Depends what you do with it and why it's so defragmented. My best guess if you aren't doing massive image editting and file conversion, your problems stem from software and files that won't degragment. (i.e. view the report) and see what files have issues. A few really large fragmented files can mess up your whole drive. XP's defragmenter sucks. The best suggestion is to get a 3rd party defragmenter, which usually has to do it from a command prompted non-GUI boot, or before the main Windows GUI loads. In NT I used Diskeeper (since M$ didn't include one). It has a free trial.
If you really need new hardware, think about your needs. 15K RPM 3.2 ms sec. drives are out there and can be aquired for as low as $250 with a U160 SCSI card. I have an older IBM Ultrastar (I say older because the amount of noise and heat it generates is much more than some of the newer Ultrastars and Cheetah X15s, though it is just as fast) and I noticed my computer goes about 3 times faster (program loading time, responsiveness due to virtual memmory) with this as my main instead of any ATA drive. There is little improvement in benchmarks like 3D Mark (since these aren't HD intensive) and most HD benchmarks are extremely ATA biased with buffer throughput the most heavily weighted component.
If your 60 GB is older, and has worse than a 9.8 ms sec, and a 2MB buffer, or has hardware problems, you might want to consider getting a new ATA. I use a hybrid system since SCSIs are small (18 GB is enough for programs, but I have lots of music and video files, those go on the ATAs). I have 2 120 GB IBM Deskstars, they work fine. Older ATA drives sometimes have 12 ms or higher secs. Buffers are also somewhat important, as in connection speed. However, I think most of these 'improvements' are mainly marketing. Consider this, my Ultrastar can only transfer 60-70 (depending upon track) MB per second, where as my 120 ATA can only transfer 40-50 MB per second. Why on earth does the ATA need a 133 MB per second interface if it can't do half that and only one drive can be connected at a time. The SCSI has 160 MB per second for the sole purpose of having a chain of multiple 60-70 MB per second drives. You get roughly 3 drives before suffering congestion.