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hm. have you tried using a different keyboard? agree that this sounds like a hardware problem.
after doing a clean reinstall as the AskMeFi responder recommended, try swapping peripherals. if that doesn't work, perhaps the keyboard port has gone dead. if it has USB support, see if USB devices will work instead.
at that point i think you'll have exhausted the possibilities, and also have put far more value in labour into a machine that sounds as tho it's not worth the effort.
Try using a different mouse (and keyboard). If this doesn't work, you'll probably have to do a reinstall. It won't hurt doing it, seeing that you were having problems with XP anyway.
I will definitely strategise this shit. Won't have time to test either of your smart nerdly suggestions until next week, but I will try to zombify or beret-ificate or both over the weekend if I can get the supplies.