Has anyone come across a problem with a HD before whereby windows
can't install after freshly formatting because 'the disk may be
damaged', a virus scan returns a negative result, chkdisk returns a
negative result, partition magic shows a 7Mb partition (on a 120Gb
disk) that can't be deleted, and the Seagate diagnostic tools show
that the drive physically passes but logically fails?

Consequently I'm left with an unusable drive that I cant install windows on.

You could try using a windows 98 or other bootable floppy disk to boot
the computer and run fdisk.  Fdisk has options to delete partitions. 
You should then be able to use Windows XP setup to install to
unpartitioned space and to format that space.  Be sure to do a regular
format, and not a quick one.

You might try to remove the partition with delpart from www.mesich.com
it will remove ant partition the drive may have been compressed or
used a drive overlay program.