I’d try the repair option in W7 first after I first disabled the self-defense module in avast! and backed up all my files just in case. With the repair function it is likely you’ll need to do Windows Updates all over again.

Re-enable the self-defense module when repair is successful and complete.

No, as long as the program is running properly after you’ve manually initiated it, you should be fine. I assume avast! is set to start in msconfig, both in services and start-up? Check services.msc as well. You’ll have to run both in your Administrative account.

Wouldn’t connect to the Internet until avast! is up and running.

Correct. A factory restore would bring you back to as-new condition with XP present and W7 gone if the restore partition is still there and it was run.