Yes several months ago a rootkit which was completely invisible to API appeared, I haven't heard any more but I'm sure we all will soon. You mentioned Anti virus and Spy bot is this a fix that suddenly popped up on the web with a warning of eminent danger? If so you have been victimized. Trust anyone that comes knocking on your display about as much as the guy selling timeshares in Venezuela.
Before you get frantic about dying drives etc unplug the net cable or disable the wireless, reboot. note the response, now plug in the net and open your browser, was your home page redirected? If so your definitely infected.
At this point if you do not have the MS recovery console installed go to the MS site, download and install, this can save some stomach acid if things get dicey.
I found a great free utility which has rooted out some pretty tenacious critters, stfw for avast!free and follow the instructions, you should tend the initial scan, follow the suggestions. I found them about 8 weeks ago and have been nothing but impressed, so impressed I bought the pro edition for windoze and Linux, so far it's pulled 13 XP-Pro and 1 millennium installation from the bit bucket. You may find the report surprising.
I bet the system has survived, now right click my computer>properties>performance>advanced>
it may be called page file memory or virtual memory, turn it off. Now reboot, after everything is settled in right click on the desktop, select properties> disable the screen saver and apply. open windows explorer, right click c drive> properties>tools>scandisk attend to any inequities suggestions will be provided, once this is complete defrag c drive, it may take a good while. I admit the MS defrag utility is almost as dangerous as accumulated fragmentation but were biting the bullet here. If you do lot of graphics or maintain a huge dynamic database disk keeper would be a good investment.
Once defrag is complete go back to my computer and turn the page file memory on but set the maximum and minimum limits to the same value, generally this will be 1 ½ times the ram, windows dialog will usually suggest a number.
Now this may sound a bit convoluted but it assures an optimized section of c drive will always be assigned to the swap file, every micro second counts.
If the above solved the problem great, practice better browsing, trust no on knocking on your CRT, visit Tech Republic and view some white papers on enhancing XP performance, disabling un necessary services and enhancing security. Also take this opportunity to create a restore point and recovery DVD's
I cant say that this is definitely what you are dealing with, I can say that since November I have seen a bloom of rouge virus scams such as I have never seen before, Vista Anti Virus 2009 for example by time line came in disguised as a Java update.
It certainly could be a hardware issue but drives usually don't fail like light bulbs, there will be I/O errors logged, if you have a drive copy utility clone the drive, a new 80 G IDE is $40.00 if you don't buy it right. At least the question would be answered.