Problems with 500GB HDD in a HP notebook

I am facing a weird problem on my HP dv6885se notebook (bought in June, 2008). This problem came after I upgraded my HDD to a bigger one and installed XP on it. The old 250GB HDD had vista (factory installed) and XP in dual boot and it never gave a problem in 2 years till it sort of died one day (some bad sectors, reallocated sector count increasing and occasional OS freezes). Didn't want to take a chance with data and hence got a new SATA 500GB seagate drive (ST9500325AS). The problem is that after power on I often get a blank screen after the HP invent logo. If I wait for more than 10 minutes at the blank screen, I get a message saying "No operating system found". I have to reboot multiple times (about 7 to 8 times) using ctrl-alt-del till I can see the image of XP booting up. Once the OS boots up, it runs without any problems.

The bad sectors on old HDD were causing OS to hang and it was not clearing the self test in BIOS as well. This is why I got myself the new HDD. The self test on the new one came out clean. I also scanned it with hdtune and it showed no bad sectors. Besides, whenever I manage to boot up after many ctrl-alt-dels, it runs absolutely fine. I just can't understand why my notebook will sometimes hang after the BIOS screen.

Note:
- I have 2 NTFS partitions C: 50GB and D: 415 GB
- I had posted this problem in another thread (http://www.tomshardware.com/forum/262253-32-dv6000-notebook-boot-hard-disk-upgrade) where a gentleman helped me to identify that there is no problem with my other hardware (memory, motherboard etc).
- Yesterday, I tested my notebook with another HDD (seagate 160GB) that I borrowed from a friend. I installed XP on it and it worked without any problems.

My queries are:
- Has anyone been successful in upgrading to a 500GB HDD on this notebook model?
- Are 500GB HDDs compatible with 2 year old notebooks like mine?

Thanks in anticipation!