This works for Eclipse Galileo but should be similar in other versions.
- Go to Help->Install New Software
- Select the Google Plugin Site. Add if not there. http://dl.google.com/eclipse/plugin/3.5
- Select the new version of the SDK. Complete the wizard.
Obvious so far. Now, go to your project and change it to use the new version you just installed.
- Go to Properties of project
- Go to Google -> App Engine
- Select Use Specific SDK and pick the newest version
- Click OK
This will make the proper changes to your project to use the new SDK. But, if you had to point to specific jars in the SDK for any reason like doing unit testing, your project will be partially pointing to another version of the SDK. To make the upgrade process much more smooth, make use of variables in the project's build path.
- Go to the java build path -> libraries tab.
- Add a variable. Call it something like GAE_SDK and point it to the root of the installed Google App Engine plugin: /eclipse-jee-galileo-win32/eclipse/plugins/com.google.appengine.eclipse.sdkbundle.1.3.7_1.3.7.v201008311405/appengine-java-sdk-1.3.7
Now update all your extra Google App Engine SDK jars to point through this variable. Next time you upgrade, repeat the same steps and update the variable.