I was able to fix it as well. If you don't want to uninstall the CA AV software, here are the steps to fix:
restart in safe mode
start CA AV
set exclusion for \windows\system32\shell32.dll in CAAV options panel for Real Time and On Demand virus checks
Run a full scan (not sure if this is necessary or not)
Reboot in normal mode and the problem is gone
CA forums say that even though 2009 works on Win 7, it is not officially supported, and recommend upgrade to 2010 version. But I doubt that is the issue. The problem seems to be the virus sig 7266 which was updated on the 28th, caused a false positive on shell32.dll and quarantined it, making it inaccessible to the filesystem, hence desktop could not load. I updated the virus sig to...