I guess it's because your HD has actually failed. Whilst the PC is unlikely to be under warranty, the HD might - can be worth calling the manufacturer of the HD to find out.
In terms of retrieving data, you'll need a new HD for your machine and a reinstallation of windows. Then you could either buy a hard drive caddy, sticking the hold HDD in that, and see if you can copy any data off. Alternatively, set the old HDD jumpers to slave (assuming an IDE drive here) and see if you can transfer any data off that way.
Another alternative is to see if you can load to the command line, i.e. not fully in Windows XP. From there you might be able to access your root drive C:\ and manually copy files onto floppy disc using DOS commands - I've done this before and it took ages, but at least the data was saved!
Others may have rather less invasive suggestions...