|Looks like there might be filesystem corruption. Defrag is designed to check the status of the dirty bit on the volume before it runs; if there is a problem, it will not run. This is an in-built safety feature.|
Run chkdsk /r as instructed here
It'll take a while depending on the disk size, and you may need to reboot.
It should work after that.
You can also check out good third party automatic defrag utilities to automate the XP defrag process so that running a manual defrag is no longer necessary.