It is not uncommon for the web folders / WebDAV support in Windows XP to just stop working for no apparent reason.
As a last-ditch solution you can usually reinstall the original Web Folders support by finding and executing webfldrs.msi with specific options.
webfldrs.msi is probably in one of your system directories. It is easiest to search for it (remember to set advanced search options to include system and hidden folders). When you find the program (it’s a normal Microsoft install package) launch it, then do these steps:
Click “Select Reinstall Mode”
  • Uncheck “Repair all detected reinstall problems”.
  • Check “Force all files to be reinstalled, regardless of checksum or version”.
  • Check “Verify that required user registry entries are present”.
  • Check “Verify that required machine registry entries are present”.
  • Check “Validate shortcuts”.
  • Press OK
Normally no reboot is required. Now the web folder client should have been restored as it was shipped.
If you previously installed Software Update for Web Folders (KB907306) from the Microsoft site, you may have to install it again.