Sounds to me the hard drive is going bad, most likely its controller board (since you tried it out in another PC with the same results and a surface scan shows no apparent physical problems). To be sure, see if you can install it in a 3rd PC; if you get the same results, then it's definitively going bad.

If it is the controller board and the drive checks out fine, you could pull the board off an identical drive with bad sectors or some other failure. Maybe browse ebay even? Kinda an off chance, but small drives in good shape are getting hard to find.

Maybe the controller card reached its hdd size limit and is writting the new data on the existing ones (lead to corrupted files and os unable to boot). That's why I always use a DDO even if the HDD size is supposely ok for both controller and motherboard BIOS (just to be safe).

It can also be due to bad sectors on the hdd, but when the same kind of things happened to me, it was always the controller card that was screwing up hdd data's (not an hdd hardware issue).

You can always check the drive for errors using an ide to usb adapter on a recent computer and try some utilities like CrystalDiskInfo... Or if it doesn't work use the original hdd manufacturer dos utilities that will instantly show hdd problems if any.

I don't think it related to the size of the HDD. 528MB was the hardware limit for so many older boards and controllers, but even my 1991 386SX-16 with its noname/chepo (and at least that old) IDE interface card can accept anything up to that size.

I had no new experiences with VLB controllers, but during their prime, I was a part time computer service tech, and remember how awfully unreliable were them. Random data corruption on seemingly nicely working systems was the most frequent problem. Based on my experience, you probably need to check your HDD in a different system or (better) find an ISA IDE interface and check the HDD in the same system.

First time I was playing with a 486 computer I had the case with an old isa controller card that saw my 1 GB hdd as a 500 MB, so I
created a 500 MB size partition on it and installed MS-DOS confident that will not cause issues (CHS setings in BIOS matched the real HDD size if I remenber correctly)...
Well, after installing more or less for 256 MB of data on the partition I was unable to access some folders or launch some games 🙁 I tried to install one more game and it crashed during the installation and I was unable to boot under dos after that. Had the same problem with a 256 MB CF on a 386 that showed corrupted files and folders after +- 128 MB of data. Don't really know if it was explicitly MB or controller BIOS that was the culprit...
Since then I always use DDO on all my MS-DOS computers era drives, even on a 256 MB CF for a 386 computer... not a single problem so far and the CF are inter-operable on all my 386-486 computers (just have to match the CHS settings in the BIOS in the worst case scenario)...
Maybe VLB controller can corrupt data IF the onboard speed is set to tight and the bus is higher than 33 Mhz but I never had any problems with a VLB controller card running @40 Mhz without WS and at the tighter speed so far (maybe DDO prevent data corruption ? or I'm just lucky)...

Also try cleaning the VLB contacts of the hdd controller, they may have corroded a bit or dusty and put some resistance between the connection.
Also did you try to run in WT mode? CPU properly cooled?
Also try a round of spinrite on the hdd, to see if it needs some rejuvination of the disk sectors. but probably the disk is just ok.

Btw What is a DDO ??

Dynamic drive overlay

http://en.wikipedia.org/wiki/Dynamic_drive_overlay

Thanks for the replies! It's actually been behaving itself perfectly since I posted this, but if it starts messing with me again then I'll be back here trying your suggestions.