Reformat of Windows XP, lost library please help!

Connect your iPod to your computer. If it is set to update automatically you'll get a message that it is linked to a different library and asking if you want to link to this one and replace all your songs etc, press "Cancel". Pressing "Erase and Sync" will irretrievably remove all the songs from your iPod. Your iPod should appear in the iTunes source list from where you can change the update setting to manual and use your iPod without the risk of accidentally erasing it. Also when using most of the utilities listed below your iPod needs to be enabled for disc use, changing to manual update will do this by default. Check the "manually manage music and videos" box in Summary then press the Apply button: Managing content manually on iPod

Once you are safely connected there are a few things you can do to restore your iTunes from the iPod. If you have any iTunes Music Store purchases the transfer of purchased content from the iPod to authorised computers was introduced with iTunes 7. A paragraph on it has been added to this article: Transfer iTunes Store purchases using iPod

The transfer of content from other sources such as songs imported from CD is designed by default to be one way from iTunes to iPod. However there are a number of third party utilities that you can use to retrieve the music files and playlists from your iPod. You'll find that they have varying degrees of functionality and some will transfer movies, videos, photos, podcasts and games as well. Have a look at the web pages and documentation, this is just a small selection of what's available, they are generally quite straightforward. You can also read reviews of some of them here: Wired News - Rescue Your Stranded Tunes

TuneJack Windows Only
iPod2PC Windows Only
iGadget Windows Only
iDump Windows Only
iRepo Windows Only
iPodRip Mac & Windows
YamiPod Mac and Windows Versions
Music Rescue Mac & Windows
iPodCopy Mac and Windows Versions

There is also a manual method of accessing the iPod's hard drive and copying songs back to iTunes on Windows or a Mac. The procedure is a bit involved and won't recover playlists but if you're interested it's available at this link: Two-way Street: Moving Music Off the iPod

Whichever of these retrieval methods you choose, keep your iPod in manual mode until you have reloaded your iTunes and you are happy with your playlists etc then it will be safe to return it auto-sync. I would also advise that you get yourself an external hard drive and back your stuff up, relying on an iPod as your sole backup is not a good idea and external drives are comparatively inexpensive these days, you can get loads of storage for a reasonable outlay.

I also reformatted a hard drive, thinking I did not need to back up the contents of the I-tunes directory because I already had a back up copy on the i-pod. Now wanting to re-install it.

I am unsure what I have to do to prevent the i-pod synching with an empty i-tunes folder and deleting everything on the i-pod. I have version 7 I-Tunes; its HELP folder says to hold down Shift and Control while connecting the i-pod. However, posts in this forum seem to be saying that it should be alt and control for version 7, and then that
I don't have to hold down anything, and the program will ask me whether I want to synch to a new library (which I say cancel to).

Which is it?

"I don't have to hold down anything, and the program will ask me whether I want to synch to a new library (which I say cancel to)"

You can do either. If your iPod is set to update automatically you just need to take care connecting to an empty iTunes. You can also use a keyboard command to prevent your iPod auto-syncing with iTunes. While connecting the iPod to the computer on Windows with iTunes 7.3 installed hold down the Shift + Ctrl keys. This will stop the iPod from auto-syncing with iTunes and the iPod will appear in the source list. Wait until you are sure the iPod has mounted, and that it will not auto sync and then you can let the keys go. This may take between 20 to 30 seconds depending on your computer: iTunes 7.3 Keyboard Shortcuts for Windows

You might also want to check out this revised transfer purchases link: Transfer iTunes Store purchases using iPod (iTunes 7.3)