Try this (untested):

select * into #t

from table1

delete a

from #t a

inner join table2 b

on b.number = a.NEW_NUMBER

update a

set a.Flag = 0

from table1 a

inner join #t t

on t.NEW_NUMBER = b.NEW_NUMBER

inner join table2 b

on b.number = t.OLD_NUMBER

You need index on number column on table2.