Machine.config seems to be part of Microsoft NET framework.
If you are into experimentation, you could try to uninstall and reinstall NET Framework from add/remove software. Perhaps there is a repair option available as well.
Or you can simply remove/move the machine.config file.
Machine.config Shrinks
Something I just noticed in 2.0: my machine.config is around 17 KB in size, compared to over 200 KB in 1.1. The file seems practically empty. A little comment at the top of the file reveals why:
“To improve performance, machine.config should contain only those settings that differ from their defaults.”
I have never tried to do this myself, but I can not find much information on your problem or the machine.config file.
Take heed, removing or modifying these files may cause Windows XP to become unstable or even unusable.