I had a suspicion that the installer in Knytt Stories would only overwrite files with identical names and paths. I was right. Just remove any unaltered files from your previous release and compress normally with the editor. (Then, put the files back.)
Step 1. Create an empty folder somewhere on you computer.
Step 2. Move any un-altered files to the new folder. e.g. music, tilesets, gradients, ambiance.
Step 3. Compress your level using the level editor. When prompted for a name choose something like,
"YourName-YourLevelName-update.knytt.bin"
Step 4. Put the files you moved back where they came from.
Note: I haven't tested to see if the level editor checks for the validity of the level when compressing. At this time I do not recommend removing any files from the level's root folder. e.g. map.bin, world.ini
This is useful when you release a level full of custom sounds and graphics. If you want to make a small change to the map or the world.ini it's better than re-releasing the whole thing. Since I'm sharing levels from my own server space, I save on bandwidth usage. Also, players with low bandwidth will be saved the trouble of re-download the whole thing.
If you're going to use updates, you have to make sure you keep track of every change in every release. Then you'll know what you can remove from the level folder and what you can't. You also need to be able to explain to the end user which updates they need and how to use them. I absolutely would not use this method on the level archive, since you can't explain how to use an update there.
Finally, you should test the update.
Step 1. Rename the folder your level is in. example: Knytt Stories\Worlds\egomassive - Shipwrecked becomes Knytt Stories\Worlds\egomassive - Shipwreckedbak
Step 2. Download the original release and the update. example: egomassive-Shipwrecked0.2.knytt.bin and egomassive-Shipwrecked0.4.knytt.bin
Step 3. Install the original with Knytt Stories. If it prompts you to overwrite, then you did step 1 wrong. Cancel action and restart from step 1.
Step 4. Install the update. This time it should prompt you to overwrite. Confirm.
Step 5. Play test it. There will be 2 copies of the level in the level selection menu. They appear alphabetically according to their folder names. In this example the new install will show up first.