I have an OCZ Fatality 550w psu, You say that the video card may be defective but I was having the exact same problems when the video card was not installed , is there a possibility that I have purchased a duff psu.
Just to let you know I have taken the gtx260 out, swapped the ocz psu for the original psu, tried playing Arkum Asylum again and still get the exact same bsod, this could be down to the fact that the onboard graphics cant handle a game like that even on the lowest settings but I am at a loss as to what is causing the problem, anyway thanks for all your help with this issue I will try some other sites to see if they can shed some light on this problem thanks again for all your help.
Regardless of which video card you've been running, you keep on getting video errors. I would re-install the latest driver again, to be absolutely sure it's installed well. Running a system file integrity check can't hurt any. To do so, open an elevated command prompt. Type this then hit enter: sfc /scannow
Make sure there is no overclocking of any sort in the cpu/ram/vram/gpu and make sure your copy of Windows is from an authorized source. Use Windows Update to make sure it's updated to latest.