Did you try to take the default Automatic Restart option OFF?
"Start"- -> "Computer" --> right click "Properties" --> "Advanced system settings".
Under advanced options of the system context menu, click "Settings" for Startup and Recovery.
uncheck the box for "Automatically restart" for system failure
Are you able to boot in the safe mode? (without the restart endless loop)
Last January there were some major issues with the Windows 7 KMS activation - That didn't have the restart issue but after the activation the product was still listed as 'unlicensed"
This was later tracked down to a mistake on the part of Micosoft's activation servers. Other than this haven't heard about any recent issues.
There are plenty of Genuine Windows keys available just for a few bucks. Why don't just buy one from eBay?