Can you update the column you are connecting to? That is t1.outcome .
Move filter expression t1.outcome = 'Fail' from JOIN and to to WHERE .
UPDATE table1 AS t1 INNER JOIN ( SELECT count(*) as total, left(number,7) as prefix, outcome FROM table1 where outcome like '%Passed%' group by prefix order by total desc limit 200 ) AS t2 ON t2.prefix = left(t1.number,7) SET t1.outcome = '', t1.status = 'NEW' WHERE t1.outcome = 'Fail'
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