My problem looked the same as for you. But the cause was the Language settings.
I did the steps that JS is describing it still failed for me.
I tried the command line solution as well ( using the steam.exe -install X: ) but that failed for me as well.
I figured out that for me it is the Locale settings.
I have a Polish Version of the OS ( Win XP ) -> but I had set most regional options set for English.
I bought the Polish version of the game, but I had Steam set for English also ( for all my games ).
This has screwed up the installation for me. When I reset everything back to Polish (Steam and OS settings). It started to install properly.
I dont know if the OS settings matter, probably they do not, I'm guessing that the Steam language setting should be the same as the game version you bought.
But since I changed my OS settings at the same time, and I had to do a reset, be aware as that could also matter.
Hope this helps.
This was annoying to figure out.... a BIG minus to the Modern Warfare QA Team!!!