I'd have to guess that the Model database is corrupt or missing. Do the files model.mdf and modellog.ldf exist in the directory that MSDE is looking in:

C:\Program Files\Microsoft SQL Server\MSSQL\data\

I wouldn't expect this to cause SQL Server to not start but you'll find it difficult to create a new database without Model. If you don't have a backup, get one from another machine or install SQL Server somewhere else and make a backup.

-Mike