PC wont boot. Hangs when starting the hard disk

seems an OS problem, and you copied the problem to the new drive !
try a repair install : http://www.michaelstevenstech.com/XPrepairinstall.htm

if it does not work, a system restore can help you out too :
http://support.microsoft.com/kb/307545

this may be done easier if you boot from a live cd : www.nu2.nu/pebuilder/ 

Can you fit the drive as a slave, and view the data on it?

If there is further corruption, I've used GetDataBack successfully on a couple of failing disks - it's free to try - and it shows you what it CAN recover, but it won't actually do it till you pay.  I paid, and am glad that I did.  You need to probably check out the NTFS version - http://www.runtime.org/

Easeus also has a good reputation - http://www.easeus.com - but I haven't used that one.  

Tried doing a Windows repair using the Install CD- didn't help
Can see the faulty HDD as secondary HDD on another system
Can get an old disk to start in the system.
This suggests that the BIOS is OK (although we had thought it was this that was failing!)
- it is the disk booting up that is failing.

You basically need to remove the partition totally from another computer and then try to reinstall windows on the disk. You might rry anti-malware/virus scans on the drive but you probably have a rootkit which usually needs a running OS for the removal software to work.  I have had some success removing rootkits with AVG Free by doing a full scan of a slave drive.

did you try my 2nd suggestion?
also, you can test your disk; download ubcd and run the disk diag you need, to be sure about it's status :
  http://www.tacktech.com/display.cfm?ttid=287

nobus... Started to do your 2nd response but didnt find the \repair\ directory.
Dont think its a faulty hard disk as an Acronis image copy has the same issue.

Have you run these commands from Recovery Console:

fixboot
fixmbr
chkdsk /r

it never talks about a repair direcory - it does not exist !

willcomp - tried fixboot + fixmbr + chkdsk /r all to no avail.
nobus - from http://support.microsoft.com/kb/307545 it refered to copying files from c:\windows\repair\

Anyway - I am thing that I may just reform the drive and rebuild

that should cure all problems, except hardware ones !
i would test both disks, to be sure (and it does not harm)

you can do a search on the disk for those files; maybe you've got a copy in another location (caused by other SP's)

Install fresh windows to that new drive, delete all partitions first and create new ones.
Install some antivirus and firewall software and copy all necessary data from the old drive to the new one.

Bear in mind that this started from a power outage, so I dont think its a virus.
Anyway, I did indeed install fresh Windows and then reload all the software and restore data

don't forget to tes t your disk drive, with the diags i linked to !

Thanks nobus - used Seagate disk checker but it was Ok