It seems that Launchy doesn't handle arguments containing spaces very well. You'll have to either:
1) Use the short version (8.3) of the .urd file in the arguments field (use dir /x at a Command Prompt to see short filenames)
or
2) Create a batch file that specifies the filename and call that from Launchy. For instance
[c:\import.bat]
start ultrarecall "c:\temp\my data.urd" %1 %2 %3
[launchy.xml extract]
<command>c:\import.bat</command>
<arguments>/importdup</arguments>
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