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Complete rebuild was necessary.

Just the way we do things. PCs rebuilt over the network automatically.

bertiebigb ----
Any reason you did not try the Repair Install?

bertiebigb --
A Repair Install is much easier to recover from.  Personal data and installed programs should not be affected.
http://www.sevenforums.com/tutorials/3413-repair-install.html

It is always a good idea to do a backup first.

Wondering whether a complete rebuild is worthwhile.

Still no joy. Tried the above.

Tried gpupdate /force. Completed deleted users profile. Still the same.

Spookily, I've tried logging in with two other users also. One works the 2nd displays the same.

bertiebigb--
"This problem seems to be caused by an incorrectly configured proxy server and often results from a recently removed malware infection"

Source:
http://blog.ryantadams.com/2010/05/09/fix-the-address-is-not-valid-error-unable-to-connect-to-any-websites/

Similarly a fellow here
http://forums.techguy.org/virus-other-malware-removal/810815-ie7-address-not-valid-http.html
fixed the problem but again access to proxy server settings was needed.

To fix you may have to change the GPO to allow access to proxy server settings.

Ah. Problem is its all locked down for the user through GPO. Cant access this.

Could you try Click on IE control panel

Internet Options->connect tab->Lan Setting->check automatic detect and uncheck any proxy setting

Close IE ad Reboot and Re-open IE

Duncan