sounds like your hard drive could be gubbed. The fact that it gets as far as the os but wont let you reinstall is a bit weird though.
It could be your os is gubbed but the fact you cant reinstall would indicate its your drive. You could try a CHKDSK /R from the recovery console. Instructions here....
To run the Recovery Console from the Windows XP startup disks or the Windows XP CD-ROM, follow these steps:
1. Insert the Windows XP startup disk into the floppy disk drive, or insert the Windows XP CD-ROM into the CD-ROM drive, and then restart the computer.
Click to select any options that are required to start the computer from the CD-ROM drive if you are prompted.
2. When the "Welcome to Setup" screen appears, press R to start the Recovery Console.
3. If you have a dual-boot or multiple-boot computer, select the installation that you must access from the Recovery Console.
4. When you are prompted, type the Administrator password. If the administrator password is blank, just press ENTER.
5. At the command prompt, type the appropriate commands to diagnose and repair your Windows XP installation.
At this point you want to type "CHKDSK /R" which will scan your hard drive for damaged sectors and attempt to repair them.
It may take a while, like a few hours while but just let it run. Dont be alarmed if it gets to 75% then goes back to 30% and jumps around thats normal. If it does fix it then get back in asap and get everything backed up. It can fix a drive but you normally find it will happen again quicker each time you do this if there are dodgy sectors on your disc.
For a list of commands that are available in Recovery Console, type recovery console commands or help at the command prompt, and then press ENTER.
For information about a specific command, type help commandname at the command prompt, and then press ENTER.
6. To exit the Recovery Console and restart the computer, type exit at the command prompt, and then press ENTER.
If this doesnt work then as Komp says get it slaved, get your data off and its new hard drive time I think.
Instructions from
How to install and use the Recovery Console in Windows XP