It's time start making comparisons; does it run any smoother in Safe Mode (choose the most basic option if possible)? I would not recommend trying to use Sys Restore in normal mode; given the extreme sluggishness, it will take a very long time and may not even complete. But you could try it in Safe Mode. If that fails to recover it, a non-destructive repair from the XP CD may help.
As to the root cause... I would only be hazarding a guess, but perhaps a virus was found and it could not be removed or quarantined.