That file is the Dr Watson error log file -- every time Dr Watson finds something fugly with the system, it appends something to the file.
This seems to indicate two problems; one, you have this farking big file that you need to get rid of, and two, your computer is suffering from some malady.
You should be able to delete the Dr Watson log file without ill effect. It's been a while (OK, a f@ck of a long time) since I used Win98 but you might have to boot it in safe mode to delete the file. This is the C:\Documents and Settings\All Users\Application Data\Microsoft\Dr Watson file, not the drwtsn32 file.
Once you have got rid of the file (which should free up some disc space), run a virus scan and a spyware scan on the machine. Also, if you see the file growing again, take a look and see what error is being reported. There may be a hint there, like a lot of messages indicating that some memory or other component is failing. You might also run drwtsn32 and turn down some of the log settings, so that it writes less information when whining.
I'd also run scandisk or whatever it's called in full physical mode to see if there are any bad disc blocks.
Hope some of this helps. Is this Win 98 or Win ME? If it's Win ME, then you are basically stuck, because Win ME was a dog.