I think what would work would be to roll back to older drivers. Sometimes the older ones actually work better than the newer ones, people (FPS gamers, etc) oftentimes try many different sets of drivers before they settle on a particular one.
With Win XP, please anyone correct me if I'm wrong anywhere, this is the procedure for installing older drivers:
Download the older driver that you want to use.
Go into control panel, click on Add/Remove Programs; Remove your old drivers, which should be listed as something like NVIDIA Graphics Display Drivers or something like this (if you have an nforce mobo make sure you don't remove your mobo drivers, which would be listed as something other than display drivers)
Reboot your computer. When you load back up, the OS will try to install new drivers for you, just cancel out of the dialog.
Install the drivers that you downloaded earlier by running the .exe
Reboot.
Your new drivers will be installed without the old ones monkeying up your setup with files laying around. If you've installed the right ones, your DF driver woes will be fixed. You'll need to check out whether or not these new (old version) drivers work for your other games, too.
Something else you might try is turning down graphics acceleration when you run DF; go to start menu, run, type in 'msconfig'; there's a thing in there to adjust your graphics acceleration settings; set it to one of the lower acceleration settings. Run DF; this might fix the problem. (This last one I can't recall if it's in msconfig or not, I haven't used XP in a year or so, but it is somewhere, maybe under display settings)
This second fix may work better, since you would be able to use your current drivers with your other games, and just turn down the acceleration when you run DF. I don't think that turning down acceleration would effect DF too much, but I'm not entirely sure on that either.
Hope this helps, good luck
Edit: This might be a long shot, but I've also heard that the sound in DF can cause problems on some setups. Maybe try disabling the sound in the init file.
[ February 23, 2008: Message edited by: Old School Gamer ]