I agree with qhm as far as getting an XP install disk and trying to repair it that way (maybe borrow a friend's?).
On a Laptop I had, it also apparently would re-install the OS via the recovery disk, but on pressing on it gave me the option to repair or re-install with a clean format, so you may want to try that carefully (maybe you could download a manual for your laptop to see what it will offer you for options using the Toshiba Recovery disk).
If you are able to start up in Safe Mode, you could also try a System Restore to before the defrag and many times that will replace the bad system file.
As for the defrag causing this, you want to be careful with what defragmenter you use.
The built-in and many freebies can't defrag system files (mainly because those files are in use while Windows is running) so they need to be addressed at boot time.
Some users figured-out a way to get the Windows 7 defragmenter to defrag the system files in Safe Mode (which is my personal theory as to why defrag is now disabled in safe mode under Win 7), but it was not meant to do that, so it can lead to problems and corrupted system files.
To handle system files, I recommend a good third party professional defrag program.
Here is a Top 10 Reviews side-by-side comparison of the best defrag programs around:
The top placers are all automatic and use little resources so you can use the PC while they operate. The gold medalist won because it was undetectable while it defragmented (even though the PC was in use running several programs) and it was the only defrag program that also prevents fragmentation.
All of these offer a free trial so you can try before you buy and the top placers will all safely handle your system files so they will not produce these kinds of problems.
Check the review out and get a copy of your favorite defragger.