I dont think you can reinstall XP through the recovery console. I'm assuming by the setup that cannot read your files, that you mean you tried to boot from your XP cd and tried reinstalling XP like that, and then it said it cannot read whatever file.
That could be a lot of things from an faulty optical drive to an overheating CPU. Yes, I've seen that kind of error because of an overheating (I think) CPU.
Could you give more details about your PC, specs, did something weird happen recently, power outage, why did you want to reinstall XP in the first place?