Google desktop and other things break this.
Try the other ways to create new directories while you research this one. Again, there must be a dozen causes for this one.
I can't create new folders from the context(right click) menu in Windows Explorer.
Here's what I get when I right click on the Desktop:
As you can see, the word "New" is missing from the menu, even though the placeholder is still there because I can still select it and create new files like bitmap images, etc.
In a possibly related problem, the "Send To" is also blank in my context menu. When I highlight a folder or file in Windows Explorer, the "Send To" option is blank:
I've seen the registry fix usually quoted with a similar problem: http://support.microsoft.com/kb/180257 But that didn't work for me.
Creating a new account didn't resolve the problem either.