I've seen this problem on perhaps a dozen XP systems over the years. I've actually fixed it only a few times. Normally, debug efforts were clearly taking too long, and data salvage/re-install emerged as the most expedient fix. (I do computer services for a living.)

In those cases I've repaired this symptom, it was always a driver or service issue. I've resolved it by deleting or moving files from the suspect software (most often by booting from a Linux LiveCD such as Knoppix). It was McAfee AV in one instance, in another I vaguely recall it was a failed un-install of a Norton security suite (which left the Registry in a terrible mess). In another case it was a bad driver which had been offered-up by Windows Update.

Incidentally I have seen serious problems with hardware driver updates from WU quite a few times, for various hardware types -- sound, video, NICs. Normally it's simple enough to roll-back to the former driver, but I have learned to use caution in accepting those optional hardware updates from WU. I haven't analyzed the problem much. It may be mis-identifying hardware or mistaking one subtly different model or chipset for another.

ubuntu
opensuse
knoppix
pclinux 9.3

note, you will need a cd burner and an iso burning program to do this. I recommend imgburn

also, most distros can't write to nfts formatted drives, they can read them though. So if your external drive is ntfs, you will have to use a flashdrive.

Btw, your problem seems to relate to the unending boot loop that is caused in compaq & hp computers with AMD processors after upgrading to sp3. Does your computer fit this? What model is your compaq computer?