Wally's post was a good start, but you have a couple of other steps to perform.
What I normally do in this situation is: 1st-find and remove all *.pwl files from HDD; 2nd - edit system.ini (using sysedit) and remove all lines between [Password Lists] and the next header (in my case, [MSNP32])...
The Posts above cover quite nicely the idea that the W directory was currupt, either as a result of a damaged HDD, or (as I have also noticed sometimes occurs) - viral infection, possible in the MBR. My recommendation would be the same as "edfair above" - replace the HDD, and install...
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