Defragging in safe mode was to sum out the idea of background processes interfering. If it did work, then you know for sure it was something interfering... Now that we know it still doesnt work by disabling unnessecary processes (when you went into safe-mode) my next GUESS would be corruption of files or the HDD itself.
It would be a good idea to backup important files like forrestcupp suggests.
Try doing a surface scan with any program to look for any problems such as bad sectors.
I assume its the 40gb and it is your C:?
Windows XP Pro 2002 (SP2)
Intel Northwood 2.4GHz
Compaq Evo D510 SFF
768MB DDR PC2100
NVIDIA TNT2 32MB
Intel 82801 (AC\'97)
C: 40GB (FAT32)