You got some serious issues that require more than what
free software can solve for you.
Download the trail,fully functional, versions of Nod32 and Ewido Security Suite. Do not install these 2 programs until you uninstall the AVG anti virus program.
http://www.nod32.com/home/home.htm
http://www.ewido.net/en/
Turn off system restore in XP to clear all your restore points. You don't want to reinfect your computer by using a previous restore point. Also the 2 aforementioned programs will find any nasties in your restore points and that would just add to the confusion.
After rebooting your computer when you have uninstalled AVG go ahead and install Nod32 and Ewido. Update both programs before using. Run Nod32 first and let it clean/quarantine anything it finds. Then run Ewido and let it clean/quarantine what it finds. Remeber to update both programs before using.
Then post a HiJackThis log in the apporiate forum on DAL for a look over by the experts to advise you on any other problems. Here's the link to HiJackThis. Unzip HiJackThis to it's own folder.
http://www.spywareinfo.com/~merijn/downloads.html