Try cleaning with a lens cleaner,
may be coincidence that drive has died and your system restore points have vanished.
You appear to have done most of what is possible, you could uninstall the IDE channel the drive is on and reinstall.
Try a repair of XP to get system restore back
Repair XP by replacing corrupt files
in the run box, press enter and let system file checker find and replace missing / corrupt file in windows and explorer.This will take awhile to complete and you may be asked for the CD to be in the drive if windows is not preinstalled on the hard drive.