Hey this is just an FYI that this information is very valid. I too, was not able to install Spybot S&D. I downloaded every kind of antivirus program and still nothing would work. I am fairly confident the trojans and viruses were removed. I neglected to check my IE proxy settings, something so simple is often overlooked by ALL anti-malware and anti-spyware programs. So MAKE SURE you check this. The symptom is simple anyway, FF will work, IE will not. My Chrome didn't function properly either...
Thanks for the help, promote the thread, its very useful. I found this thread via Google.
Spybot S&D Will not install - keeps directing to 127.0.0.1
Solution: Check IE proxy settings for Hidden proxy.