I had the same problem in that XP suddenly wouldn't recognize my laptop USB drive(s). I have two flash drives and plugged them both in to different usb ports and neither of them were recognized, hence, the problem was with Windows and not the flash drives. Here is the solution I found on Microsoft's website:
CAUSE
By default, the Removable Storage service is disabled after you install Update Rollup 2 for Windows XP Media Center Edition 2005.
Note This change enables Windows XP Media Center Edition 2005 to work with supported DVD changers.
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WORKAROUND
To work around this issue, follow these steps before you use a tape backup or a program that uses the Removable Storage service:
1. Click Start, click Run, type Services.msc, and then click OK.
2. Locate the Removable Storage service in the Services console.
3. Double-click Removable Storage service. In the Startup type box, click Manual.
4. Click Apply, and then click OK.
Note To use a supported DVD changer, disable the Removable Storage service.
I also started the service. I don't know if that was necessary or not since they didn't say. Anyway, it worked like a charm and I hope it does for someone else. I know how frustrating things like this are and want to help put others out of their misery, too.