Is this Avira Free AV on the rescue CD that you provided?. I'm getting the extact same problem. Once SAS detects and tries to remove the spyware, it wants to reboot your PC. One it does, it goes into a reboot loop. I actually see a blue screen for 1 second before it reboots again..
Yes, Avira Free AV is on the rescue disk.
Please provide the details if the blue screen: press F8 on startup and select "Disable Automatic restart on system faliure" : it will allow you to see the BSDOS screen.
When I turned on my computer last night, my Anti-Virus program received the latest update. Then the virus shield detected the Vundo in memory, registry and file system. Once it rebooted, all of the trojans where gone except for the Spyware. I ran a complete SAS scan to remove the rest. It rebooted with no problems. I ran both my Anti-Virus then SAS and both ran clean. But I noticing two problems..
1. I can only access certain websites, cnn.com, gmc.com just to name a few. But I can't access wtopnews.com and others. I did install IE7, but that didn't help. I also updated to XP Service Pack 3. No help..
2. My Anti-virus shield detects the Vundo virus from time to time. Once its detected, its deleted. I'm thinking that maybe its spawning somewhere due the programs above over-looking a Vundo file of some sort...
PS - I download the Windows Version of Avira and everything checked out...