I'm running on Windows XP with Service Pack 1.

The last few days, all of a sudden, the drag and drop functionality of explorer (or anything on the operating system that uses system calls in order to perform it) screws up completely.

I attempt to drag it, and it just flickers a bit to the direciton I'm moving it and then fails.

It doesn't seem to be the mouse as I can still drag a rectangle selection to select multiple files etc, just no drag and drop.

However, it isn't always like that, it works generally (as far as I know) and stop working out of nowhere, and then stops again.

Even if I shutdown explorer itself and re-open it, it doesn't make it starts working again (when it stops).

Does anyone know what might be doing on?

The chances of a virus or something malicious on any level running on my pc is extremely low, but to be safe Iv'e just gotten AVG Free (I already ran a registry application and an Anti-Spyware tool) and am about to install , update and run it to be sure (on the off chance something managed to get onto it).

I had exactly the same symptoms.
It turned out to be a sticking escape key.
Check it out. Hold down the escape key and try and drag and drop.

Regards
Ailuro