The system is Windows XP Pro (with SP 1 and latest MS updates), PIII 800 MHz, 512 MB RAM, lot's of apps installed, few tweaks made (but nothing that should cause anything like this).
I'm sure that it's not hardware problem. This has happened to me before on the same machine. I recently re-partitioned, re-formatted and re-installed Windows as a new installation. For a few sweet days Win+E worked - then all of a sudden it stopped again. I tried going back to system restore point made at the time when Win+E still worked - but it didn't help.
Oh, and when I press Win+E for the first time after reboot, the cursor changes promptly to a busy state, but nothing else happens.
Has ANYBODY else encountered this? MS knowledgebase doesn't have anything about this.