Hard Driver Can't Formatting - Catalog Not Empty

I was posting some pictures to a bird forum last night and when I tried opening a folder I was told that the hard drive, c:, was nor formatted and asked whether I wished to format it. Naturally I clicked on No and tried to contain my mounting panic. I defragmented the hard drive and was told that the defragmentation process was successful apart from 123 Kb in My Pictures - I'm assuming this refers to the problem folder though originally that contained a lot more data. The files are all backed up so I tried to delete the folder but was told this was not possible as the "catalogue is not empty". In the end I just renamed the folder "Black Hole" in case I click at the wrong time and accidently reformat the harddrive. Under Windows 98 I would have run Scan Disk to see whether there was physical damage to the harddrive and repair or at least isolate the damaged section. As I recall that's not possible with XP. I thought of restoring an earlier configeration but I'm not sure when the problem arose. I really have 2 questions.

1. Is there a likelyhood of a serious problem with the harddrive?
2. How can I get rid of the folder and prevent the same thing from happening again? I'm not sure if it's relevant but I have a dsl connection with a firewall from Zone Labs, a virus progamme (McAfee) and I regularly scan the harddrive using Spybot and Adaware.