Reworking the query to:
update tempdb..ICG_ENGINES
set COUNT_TBLS_DBS = (
SELECT count(distinct d.DbName)
from tempdb..DbSize_all d
where upper(d.MachName) = tempdb..ICG_ENGINES.SERVERNAME
and upper(d.SvrName) = tempdb..ICG_ENGINES.INSTANCE_NAME
group by d.MachName, s.SrvName)
should work.
