My guess would be a corrupt registry? I remember having a similar problem, but as far as I can recall I don't think I could even get into safe mode, and like you I couldn't perform a successful system restore. The method on the Microsoft site didn't seem to work either.
I think I managed to fix it by proceeding to reinstall XP again, whereupon it detected that it was already installed and offered to repair it instead of reinstalling.
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