Computer restarts at start screen after SP1 with PCIE Card

My specs:

- ASUS M4A78T-E
- AMD PHENOM II X3 710
- 2x2Gb RAM
- XFX ATI RADEON HD 5670
- THERMALTAKE PUREPOWER 450W

My problem:

Computer works "sort of" fine until I install SP1. I say "sort of", because some demanding video games have a problem where a black screen occurs randomly and sometimes computer hangs with a stuttering sound, other times the game crashes and I get the message "ATI drivers failed" or similar, however, I haven't updated Catalyst software for reasons you'll see below.
No problems whatsoever during regular use. I also check temps with MSI Afterburner. I don't ever allow it to go past 70s just in case.
After installing SP1 however, computer stops working. Windows logo starts to appear and as the red dot gets bigger, it hangs, then restarts.
If I use HD3300 onboard video card it starts normally.
The only way I can access Windows with HD5670 is in Safe mode with command prompt.
I stressed the CPU, Videocard with OCCT and had no problems.
If I try to install the latest Catalyst software, it crashes, then a yellow exclamation appears over HD 5670 icon in Device manager.
I formatted everything, tried again. Same thing.