So am I right in thinking the phone is still getting stuck whilst booting? You may have already tried it, but the thing to do would be to remove the battery for 30 seconds and then put it back in before holding home + power to boot into recovery. Does that help at all?
The USB error could be due to the boot loop, but that USB error is very common even with a working phone. Again, first thing I would try would be a battery pull to make sure it's properly switched off and then running the RUU.
You would also be doing yourself a favour, if at all possible, to use a windows XP machine rather than Vista/7. The USB connection error is far less common with XP, for whatever reason.