Mexican standoff!
My final thought is that something has obviously changed, and...... you're dead in the water.
I thought so too......but decided to give it a couple more shots.
First I checked with my daughter who's away at university and confirmed she is using exactly same versions of the OS, MS Word, and XML Converter....and is operating without problems.
a) I reinstalled OS 10.6.8 using the combo update and and also updated Safari.
b) I used Cocktail to:
1. Reset home directory permissions and ACLs
2. Run the three maintenance scripts
3. Purge inactive memory
4. Rebuild Launch Services database & Restore default file associations
5. Clear User (Me) caches for System, User, Internet
6. Check for corrupt Preferences (there were none)
Something in those 6 almost got me there - almost because the .docx files were now all blank-looking rather than Word icons. Also, although they would convert and open directly..... they opened in Pages. Rats.
However, if I dragged a blank icon to the desktop and opened it from within Word, it would convert perfectly. And, the icon on the desktop would change to a Word icon.
I then used Disk Warrior to rebuild the directory (using the Scavenge option and the Ensure Format Case Sensitivity option).
All the icons are now reverted to Word icons and .docx documents convert as they did before. Whew!
Thanks for sticking by through this saga....it's appreciated.