I've heard bad things about Bluetooth dongles. If you have a PC, have you considered getting a wireless card you can put inside your PC? Or, if you have a laptop, maybe a network PC card? It's probably cheaper than the USB dongle anyway... plus you get to have another free USB slot
To check to see if your USB drive is in fact defective, put another USB device into the slot, restart, and observe. If you have USB mouse, try putting that. If it can recognize it after the reboot, then its just the Bluetooth dongle's fault. You can also try a thumbdrive, basically anything that uses the USB interface
Hope this helps.