You seem able to restore the factory image and start Windows -
it trotted to M$ and downloaded all the updates including SP3!
Perhaps that is the problem! Disconnect it from the internet and turn off automatic updates - there may well be a problem with a patch.
Can you get it to restart off-line in a stable condition? What SP level is the original restored image?
It could also be that the so-called "recovery image" files are corrupted.
You could try contacting Dell and requesting a proper installation disk for XP (preferably with SP2), then doing a proper install.
SD