When yum says "zlib = 1.2.1.1 (not provided)", it means that after the result of the transaction you're attempting (yum update), most likely a newer version of zlib is to be installed. And likely there is not a matching version of zlib-devel in the yum repository, so yum just stops to ask what you want to do.
I don't think you need zlib-devel. Try 'yum remove zlib-devel'. Watch it doesn't prompt you to remove something important though - ask if you're not sure.
After that, yum update should work again.