Fragmentation will slow a drive to crawl, but not kill it.
As for your 10% fragmentation, it does happen, due to the fact that certain Windows files grow daily and are never defragged (because the OS is always using them), because browser caches throw an incredible amount of trash on your HD, and because the built in windows defragmenter just isn't that good.
You may want to try clearing your browser caches before defraging and using Defraggler (www.piriform.com) instead of the Windows tool. Also, if you have files that Windows insists on increasing the size of daily (there is one, IIRC "MSFT" in Windows 7) you can move it to the end of your drive by booting with a Windows boot CD (I use Falcon's Ultimate Boot CD) and then using...