Let me be blunt that as we add software, shortcuts to the quicklaunch bar, defrag will fail! Microsoft didn't make this area very resilient.
Don't format your hard disk and reinstall over this issue since for most, a boot to SAFE MODE will let it scandisk and defrag. IF you want to try to fix it, then be aware that many softwares such as ZoneAlarm and others will cause issue with scandisk/defrag. You can argue if you need ZoneAlarm all the time since their is no exploit documented (ever!) for Windows ME if you don't share the file system and have run Windows Update. I'm being very specific here that we are talking about a outside attack and not a virus issue.
The complete article that applies to defrag as well is http://support.microsoft.com/?id=222469 if you want to try to fix that. I find it easier to just boot safe mode, defrag and then come back later, reboot and use the machine. Defrag may be an once a month item, but some seem to run it as a screensaver...
Bob