I'd like for apps to download 'free updates' whenever they are available so when I sync my phone they will already be there, similar to podcasts.
Is there a way to configure iTunes to do this automatically?
There currently isn't a way to do this. Especially with iCloud app downloading, I don't think there's any technical barrier to automatic updates. I think it's probably an intentional decision by Apple to keep app updates manual. That way, users are not surprised when an app suddenly changes UI or gains/loses features. However, I personally think the benefits of auto-updating are greater than the costs, especially for the users who never ever update apps.
I'd highly suggesting taking a trip to apple.com/feedback and submitting this as a feature request. I'd love to see this as a preference added in. Apple (surprisingly) does place a lot of stock in user feedback, so the more requests about a certain issue, the better.
This is now possible for jailbreakers.
Check out "Auto App Updater" on the ModMyI repo.
It does exactly that! I just installed it and it's perfect. For those of you that are worried that it's a bad idea to update apps without making sure they don't have "major bugs" should turn off auto updates for your mission critical apps in the settings. Problem solved.