This is aimed a Premiere Pro, but may help
First, work through all of the steps here http://ppro.wikia.com/wiki/Troubleshooting
If your problem isn't fixed after you follow all of the steps, report back with the DETAILS asked for in the questions at the end of that link
Pay special attention to Question 1 - the Codec used in the file
You say "avi from a digital camera" which usually means it is not DV AVI Type 2 file, but instead is some other compressed type of file hiding in an AVI wrapper
My GUESS would be that some update and messed with your codec entries in the Registry, and the codec you need is no longer properly registered
From the troubleshooting page:
1. Video Codec: M4S2
Audio Codec: 0x001
3. Windows XP Home sp3
4. AMD Athlon 64 3300+ 1.81 GHz
5. 1.43GB RAM
6. SiS 760 Driver ver. 22.214.171.12471
7. 1 Monitor
8. Realtek AC97 audio
9. C drive: 142 GB/86.8GB remaining, only divided into C and D drives. Non-raid. Everything is on C.
10. Casio EX-Z750
11. Adobe Photoshop Album 2.0 Starter Edition
13. A serious error has occurred. Premiere Elements is shutting down.
14. I want to make a video (as I have done many times before). I try to load a .avi file. Premiere Elements hangs, or in the case of an old project gives the error message above.
15. This same process has worked for years.
16. Tried the software repair function on the original product disks.