I found this issue on the Microsoft support site last night troubleshooting a different XP issue of my own.
(I tried to post this last night, but the hamsters ate my reply and I was too tired to wait for the server to behave again )
It doesn’t EXACTLY match your issue, but it does involve the OS not recognizing that something other than IE is the default browser. It won’t hurt to install the listed update, and it wouldn’t surprise me a bit (especially given the list of files it updates) if this helps your issue.
critter42