"Am considering removing hard drive and replacing with a new one, installing XP etc onto this and then retrieve data from old one"
This is a good idea, if the drive is failing, you may only have a couple more opportunities to copy the data off, the more you mess with the drive the less chances you have.
Connect the new drive and install XP on it, install drivers and updates, shut down then connect the sick hard drive.
Leave the sick hard drive disconnected until you are ready to attempt data retrieval.
Try removing any newly installed hardware or software from the system, if possible. That issue is Operating System-related as something is either conflicting with the Operating System with a hardware driver or some piece of software, or the Operating System's files are corrupted. If you can, try booting into Safe Mode and checking Device Manager to see if there are any conflicts or issues.
mombodog
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