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?
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.
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.