Let me hop on this thread as well
I just installed a fresh copy of Windows XP SP3 with ALL current Windows Update content.
Got the Avast! Free from Download.com and installed. PC has currently NO other programs or content installed.
Still, I do have the same problem as discussed in this thread. The moment I turn Web Shield OFF, all traffic is restored, turn it back ON, nothing whatsoever.
Also, running a second machine here, same engine/updates but on Windows 7 64bit, that one had no problem (posting from it atm...)
Tried a lot, if not all tips I have found here, all the way up to disabling the MS Firewall, but until now, the only working solution is running without Web Shield...
[EDIT]
I now have the system up and running WITH Web Shield turned on, however, I had to uncheck the "Scan Web (HTTP) Traffic" part.
[/EDIT]