Strange Display Problem (laptop)

I think my laptop heard me talk about a Macbook, and got jealous, so now it's demanding attention.

Dell Inspiron 1501, ATI X1150 video, XP Home SP2.

I haven't installed any new programs lately. The last program I installed was Chaoscope (the fractal renderer) and that was over a month ago. The only patches I've applied to the system since I received it towards the end of May was those needed for MMOs, ie WoW, CoH, Guildwars, or for Firefox. No driver updates, no system updates.

Last night, everything worked fine. This morning, however, there is a very strange display problem.

All JPGs are washed out. They look like they're being displayed at 256 colors. Not even 16 bit.
Additionally, system elements like title bars or even the Welcome screen, are no longer displaying their usual gradients, but instead are going from "dark blue" to "light blue." As an example, the light-flare in the top left corner of the Welcome Screen should look like a glare or a light flare, but instead it looks like a white circle.
Games and GIFs look fine.
Movie players look horrible but the movie/dvd itself looks normal.

I double checked my video settings, and it is set at 32bit. I even switched to 16, but had the same problem. Tried different resolutions, same thing.

I booted into safe mode. Everything looked fine. Opening pictures, everything looked normal.

Rebooted. Same original problem. Created a new user. Same original problem.
Rebooted again. Took a screenshot. There is no visible issue! but looking at the screen itself it's fuxxored.

Rebooted using F8 again. Enabled VGA mode. It looks the way it should. Rebooted normally. Still, the problem exists.

Here's an example of the problem: I was using this picture (deviant art, work safe) as a wallpaper up until recently.

Since the screenshot didn't work, I took a digicampic and here's what it looks like. (The reflection is because it's a glossy screen. The moire effect isn't present on the actual screen, either.)

I'm at a loss. It's possible it's a driver problem (especially since everything displays correctly in safe mode)... but why would the driver just die over night? And why aren't games displayed improperly? Could there be a problem with the 2d graphics as opposed to 3d?
Looking on Dell's site, there is a driver update that was posted approximately a month after my laptop shipped, but I'm hesitant to install it. (I've had experiences with Dell video driver updates and tend to shy away from them.)

Any thoughts?