If you have a python slot, you can specify it just by tipping the method: self.update_time. This works for all methods accessible by Python.
self.connect(self.timer, QtCore.SIGNAL("timeout()"), self, QtCore.SLOT("update_time()"))
should be
self.connect(self.timer, QtCore.SIGNAL("timeout()"), self.update_time)
anyway you can use the newer connection way:
self.timer.timeout.connect(self.update_time)
if you want to use your original syntax, you have to decorate your method update_time with decorator @pyqtSlot