No, that will not keep the 328 from responding, unless it drags down the 5v line.Do you measure 5V at the power header?
What is the sketch doing there in the libraries folder?It should be in your sketches folder, and not inside the C:\Arduino download folder at all.
Atmega chip detector.
Can you do it again with maybe double the resolution? As far as I can tell it looks OK though.
Did you have anything connected to the Duemilanove before it failed? Like a LED, motor or something?
Also that photo looks a bit different to the Duemilanove I've seen. Is that a genuine one? Where did you get it?
You're the man! This means that my crystal went to the space?!?