HD 6770 Issues with windows XP SP3 x86

I am facing one weird problem. I don't know if it is related to my GPU, MOBO or something else. i will first write down my configuration
CPU- i5 2310 2.9ghz
RAM- 4 GB DDR3 1333 MHZ
GPU- MSI Radeon 6770 1 gb ddr5
MOBO- Intel DH61WW
HDD- Seagate SATA II 500gb
PSU- FSP SAGA II 500 Watt

Now the issue is that my screen freezes for 2-3 seconds in every 3-4 minutes. When it cmes back to normal my cursor has actually moved as much as i have moved my mouse even when it was frozen. My statement can be a little confusing. What i mean to say is that it keeps track of my mouse movement and windows actually registers every movement of my mouse even when the whole screen is frozen. It just freezes, doesnt crash, no BSOD, no error. Its not just the mouse cursor which freezes but its actually the whole screen. For example if i am playing a game my whole screen just freezes and when it comes back i have no idea where i am looking in game coz it has registered my mouse movement and it has moved accordingly. This problem comes only with windows XP sp3 x86. With windows 7 there are no issues watsoever. But games like counter-strike 1.6 have some issues regarding mouse acceleration in windows 7 even after applying various fixes like MarkC etc. so i wanted to revert back to XP. When i try to install SP2 BSOD comes up even before windows setup has started. This freeze happens even with low profile games like cs 1.6 so i don't think its an issue of overloading. My CPU usage never go beyond 50% even when i am ingame. I have tried everything from reinstalling windows several times(clean install), changing mouse, updating bios, updating mobo drivers, latest amd gpu drivers, latest INF files from intel(though whenever i do this it gives me surge warning on USB ports). I couldn't find anything on google so finally i am here. When i go back to windows 7 everything is fine and smooth but with win xp sp3 it cmes back again.  

Please help me out i am literally fed up!