Have you tried defragging from file list?. I never use the DEFRAG (full) option. It's slow as hell because it tends to suffle all data around, even data that isn't fragmented.
Installed MSE 4.x on a pseudoinfected XP machine (SP3), after cleaning it, and it worked for me. Or, at least, I didn't notice anything out of normal.
Eventually I formatted it and installed MSE 4.x again. No issues either...