When I was experiencing trouble with one of the farms I manage, a recent KB article (896961) provided a workardound. It was determined that we should indeed upgrade to Service Pack 2, which we did. At this point, we reverted the previous registry entries (as the issue was only supposed to affect Service Pack 1). The farm performed up to par for approximately one day, and then it was downhill again. After re-applying the registry fix/workaround from the KB, the farm and can once again get back to indexing itself.
The lesson? It appears that the loopback check described in the KB is alive and well in Service Pack 2 as well.
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