Hi

Is it necessary to install Windows Malicious Software Removal Tool if you have an AV?

Malicious software includes much more than what an anti-virus program can detect so one does not negate the need for the other. In fact, MS encourages you to run a full arsenal of tools for real-time protection and run the Malicious Software Removal Tool upon its monthly release. Notethe tool looks for known malicious software that may have made it past your other defenses - so it is a good idea to run it.

Keep in mind the Malicous Software Removal Tool does not really "install" - it does have components that are saved on the computer, but once run, it removes itself. It does leave an entry in your Registry logging when it was last run - but that entry just sits there. So the Tool runs once, then that's it. Then next month, MS will release a new version and the cycle repeats.

So my advice is let it do its thing - and if it turns up nothing, great! If it finds stuff, then you need to re-evaluate your current security setup.

Thanks Digerati

So if it starts running in the background & I switch of the computer will it do a full scan when I next switch back on?
Also do I need to download XP service pack 3?

If by "switch off" you really mean you go through the Start Menu option to "gracefully" exit Windows, then shut off the computer, then yes, that is fine and it will finish when you reboot - note, it may finish during that next boot so don't be alarmed if the next boot takes a couple extra minutes.
Yes. Everyone with XP needs to install SP3 to ensure you have installed the latest security updates. Note that if you have been disciplined at keeping your system updated, SP3 will have very little impact - a good thing.