Yipee!! I ran the windows 7 club utility to reset all dll's. Then I went back and stopped the wmpnetwrksvc service. Navigated to C:\Users\(user)\AppData\Local add deleted all files.
Then restarted the service and opened WMP and it rebuilt the library. I had tried this before but I think the Fix WMP from: Windows 7 Tips, Downloads, Security, News, Phones, Office, Live.
utility made the difference. Before this I also deleted the library entry for music and added it back.
I read this here on a past thread.