Windows 7 - System Volume on Disk is Corrupt

Hi everyone. Here's a complex problem.

Preface:
While I was on my PC as usual one day, everything froze except the cursor, and I had to reboot. But upon restarting, I was presented with two options. 'Repair (recommended)' and 'Start Windows normally'.
(The following happens every time, and is still valid, nothing has changed).
Upon selecting 'repair', startup repair starts, runs, and it identifies the problem 'System Volume on Disk is Corrupt'. Same is the case when I boot with the Windows installation DVD and try startup repair.
'Start Windows Normally' brings up the 'Starting Windows' screen, it stays there, no animation takes place for about a minute, and then the Windows logo animates in, and the computer restarts.

Please note:
I'll refer to:
New HDD on which I installed Windows: Spare HDD
The HDD with the corrupted Windows: Bad HDD (has 4 partitions, 2 for data and 1 for windows, and 1 system reserved partition). it is 1.5 years old.
Corrupted Windows partition: Bad partition
P.S. I don't have an image/backup of the bad partition.

What I did next:
Installed Windows 7 on a spare hard drive, and attached the bad HDD as secondary. All my data was found to be safe. Except for the partition which is supposed to be the Windows partition. It is not getting recognized as a readable partition. Windows sees it as 'raw' partition, unformatted. Of course, I won't format it.
I installed PartitionWizard and checked the contents of the unreadable partition. All the files and folders on the bad partition are intact, nothing has gone. But the problem is, it's unreadable. I also tried rebuilding the MBR of that disk via PartitionWizard, nothing. No change.

So in a nutshell, the whole question is:
One of the partitions (which happens to be the Windows partition) on my hard drive has corrupted, and my computer can no longer boot up. If I try accessing the partition from another Windows environment, it shows up as unformatted (raw). Although all files are intact, and readable by PartitionWizard. Question is, how do I make this partition readable (by Windows) again?
I believe, once it is made readable, I MIGHT be able to boot from it.

Thanks for any help guys. I'm running the same thread over at How-To Geek Forums, but things got a bit complex there, however you can check it out for reference. I'm looking for feasible solutions, and will try them.

Thanks in advance!

Check the hard drive with the manufacturer's diagnostic tools.
Hard Drive Diagnostics Tools and Utilities (Storage) - TACKtech Corp.
HD Diagnostic

Thanks for the reply
Since the bad HDD is Western Digital, I used the WD utility. The test failed, so I tried 'Acronis drive monitor'.

And both tests tell the same story. This is what Acronis reported:
"The device, \Device\Harddisk1\DR1, has a bad block."

However, Acronis shows that the HDD is 98% healthy.

Where to go from here?

Depends on what you want. Do you want the hard disk working (which repairs could result in loss of data), or would you rather get your important files off? I would recommend first backing up your important files by following the steps in Backup Files Using PartedMagic. You can get PartedMagic at PartedMagic.

After you get your important files back, we can work on trying to fix the drive.

Hi. So I'll backup my data now. But once that's done, would it be possible to repair the hard disk and get it back up and running? Or is it, well, wasted?

Depends on the extent of the damage to the hard drive. If it is a mechanical failure, the drive should be returned and replaced by the manufacturer if it is still under warranty. If you just have some bad sectors, it is possible to reclaim the drive, but you would want to monitor it for a while and make sure it is not mechanically failing. If it is mechanically failing, you will see these symptoms again within 1-4 weeks.

You can copy & paste your DATA over.

The spare HDD is only 80GB, so I'll have to manage some storage options...

I thought you said that the working Windows system you are currently running saw the old Windows partition as RAW and so it was inaccessible? Or did you store your users folders on another partition and can still access them?

Exactly!
I mentioned in the first post. The Windows partition (now inaccessible) had no important data on it, all my data was in the other 2 partitions which are (luckily) readable and all the data is accessible.
Does that mean I don't need to backup any data?
I had some bookmarks in my browsers running in the Windows partition, so yes, a little data recovery is required, however...