Thanks for the tip, but already tried those steps, and also the other KB articles that it links to.
It appears that the user have upgraded to IE8 prior to this error, so something must have gone wrong there.
Uninstalled IE8 and repaird IE7, and the icons in networing are back.
However, IE7 (and 8 as I tried to upgrade again) is in a terrible mess, not working properly. Tried the usual repair functions etc, disabling add-ons.
Installed Firefox, and it works fine.
Looks like the computer have a problem with the Windows Live suite, as it gives an error to one of these programs when loading Windows and the desktop. Also unable to uninstall or repair Windows Live using add/remove programs.
So the status is now:
Firefox works OK atm.
IE8 - not working
Windows Live - unable to remove
Drag & Drop / Copy & Pase - not working
Heading towards a complete reinstall of Win XP, if I get the user to backup his personal files and folders.