Quick update.
I re-installed XP and all was working well till today when the typing lag came back out of no where!
By chance, I did a quick Google search and found a post by someone having the same problems as myself. The answer was to disable PCMservice.exe which as I understand is a component of Dell's Media Direct. Low and behold, typing latency has gone!!
If only I had found this post before went through the trauma of re-installing!
One thing it has taught me though, is the Avast internet security suite is the business.
Whilst trying to re-install XP, some of the programs that I was installing including Window's updates kept hanging, and I'd find myself doing hard re-sets.
After I un-installed PC Tools firewall and coughed up for the Avast suite, my laptop runs like a dream (touch wood).
So thankyou to everyone who tried to help me with this problem, but like most things in life, you have to learn the hard way!