What will not come up in Safe Mode, the error message or System Restore?
Do you have the same problem if you logon as another Administrative User, perhaps you could use the Built-in Administrator in Normal Mode?
Any virus in System Restore folders is not going to impact on your machine unless you restore it from System Restore in the first place. To get a virus in your System Restore points you would have to deleted any virus in the first place.
What virus scanner are you using? Does it have any preferences or exclusions set to ignore the System Restore folder (System Volume Information)?
Some general things to try.
See if System Restore will get you back to a restore point before your problem with System Restore.
Try running ChkDsk to check your drive for errors. Right-click your Drive icon/ Properties/ Tools/ Error Checking. Select both boxes.
Run the System File Checker program from the Run Box by typing.....Sfc /Scannow in it and have your XP CD handy.
HOW TO: Verify Unsigned Device Drivers in Windows XP
If they don't work you could try repairing windows by running it over itself. You will lose all your windows updates but your files will be untouched.
How to Perform an In-Place Upgrade (Reinstallation) of Windows XP (Q315341)