I've had this before...
For ease of re-install, I had made a 'copy' of a full working XP installation, meaning: C:\Documents and Settings, C:\Program files and C:\Windows folders all copied one-on-one to a DVD.
(On a dual boot system, booting from a different partition.)
Now some time ago (I suspect this was pre-SP3) I know I could just empty the C-drive (apart from the boot-stuff that is) and copy the DVD contents back to C:\ and then boot with that 'restored' version of XP. And successfully logon and work with it.
But, after I got SP3, and had made a similar backup, this trick did not work any longer. Exactly the same thing: logon window, you login successfully, get to desktop, then it just says 'Logging off' and voila, there's the login screen. Even with Administrator, even in safe mode...
I do not know why, and I could not fix it. And I've tried lots of stuff... for several days... In the end, I just re-installed from CD.
Me thinks an SP3 feature... somehow the installation thinks it's corrupted. Enhancement in security by MS?