Unknown spyware - unable to browse, or run programs!

I run XP on one of my computers. As a webmaster, I frequently check my work in different browsers, and I had IE 8 installed on that machine. While I was still in IE, I also visited my bank website, and few other sites that I go to frequently. I had never had problems with these few sites. However, it seems that this time something happened; I picked up some sort of virus or spyware; it's hard to tell what.

On the next reboot, I went back to IE and wanted to go to Google, but instead, there was a warning that my computer was infected with a virus, and that I need to install a program to remove it. I didn't click to install it; I just closed the browser. I thought, ok I was going to run Adaware and see if it could fix it. However, instead of opening the application, there was a javascript-like alert telling me that Adaware application is infected by the virus, and asked me yes or no if I wanted to install application that would remove it. Of course, I hit NO to prevent further damage to my system. But after that, every 15 - 20 seconds, a similar alert would pop up on the screen telling me that the system is infected by the virus and asking me to download a cleaner app. In these short intervals when the alert was not on, I tried to go to msconfig and see what is running on startup, but as soon as that would open, it would close, and another alert was there saying that msconfig was infected by the virus and... so on. The same thing with the Task Manager.

Even worse, every few minutes IE opens up by itself and serves me porn ads and sites.

I don't know what to do; I don't even know what I am dealing with? Is there any way to find out?

Thanks.