so to update a singleplayer world to anvil format you just load the world up on a 1.2.3 version of minecraft, but how does a person update a bukkit server world to anvil format? Apologies if the question has already been answered.
Bukkit should also convert on first-load. I have heard of issues with servers that have multiple worlds and Bukkit only converting the first one, leaving people to manually convert all the rest. I'm not sure if that's still an issue, but in any case, if you're not multi-world, you should be good to try it out Just one thing... BACK IT UP FIRST (and frequently). It is your only true defense against failure here.
I would probably make a separate folder for Bukkit and, one at a time, copy each world there, modifying server.properties to point to that world. Start the server, watch it convert, stop the server, move the folder to your updated server. Again, backups before doing anything. If you see just .mcr files in the region sub-folder of the world, it's unconverted. I believe converted worlds will add .mca files. You may not have to do this, esp. if you have a very current dev build of 1.2 and your multi-world plugin (and if they fixed the issue, wherever it was), but just be aware of it.