My favorite euphemism for erasing a system and reinstalling Windows from scratch, a nuke-and-pave should be your absolute last resort for recovering from a botched SP1 installation. It's a complete solution, to be sure, but it comes with its own set of annoyances -- hence, it's best employed only if everything else has failed to return your system to normal.
For one, it's often a fairly messy operation: you not only have to reinstall applications, but track down drivers, install updates (including, most likely, SP1 itself), and transfer over all your existing user data. That said, there are a few tricks you can pull to make this incrementally less painful.
The single biggest trick to keep in mind is that reformatting your system drive is not always required. If you have a Vista installation DVD (not a "restore image" disc), you won't have to reformat your Windows partition. This will save you the trouble of having to copy out your user data and possibly some of your programs as well.
Here's how to do this: When you boot the DVD and start the install process, select "Custom (advanced)" as the installation type, and then install Windows to the partition where it already exists. Do this and you'll get a warning: The partition you selected might contain files from a previous Windows installation. If it does, these files and folders will be moved to a folder named Windows.old. You will be able to access the information in Windows.old, but you will not be able to use your previous version of Windows. Click OK, and the installation will continue.
When you're finished, you'll find a directory named Windows.old that contains your old Windows directory, your old Users directory, and your old Programs directory. Obviously none of these will be functional (i.e., you can't boot the old Windows directory), but you'll be able to copy data out of them into your working Windows installation without having to go to another drive. It's a big timesaver.
If you decide to "nuke and pave," you can keep your old Windows installation in a backup directory for easy reference.
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If you don't have enough room on the target partition to perform the installation, you can mount an external USB drive, boot the installation DVD, select Repair / Command Prompt, and copy files out from the existing Windows partition to the USB drive. You may need to check to see which drive letter the USB drive is mounted as, but if C: is your Windows partition, D: will be the installation media, and E: will be your USB drive.
Another possibility is to run a repair installation, which preserves as many installed programs and user settings as possible. Keep in mind this is really only possible if a) Windows itself is still bootable and b) you have enough free space to perform such an operation. If you can boot Windows and run setup.exe from the top-level directory of the installation media, you'll get some guidance on how much space is needed.