To restore your iBook, ensure you have the original install CD/DVD, make sure everything's backed up, then insert the CD and shut down the computer. Boot up and after the bootup sound, hold down "C" for CD, and it will boot from the install CD and run through the installation for you. Just tell it to erase and install and it'll put a fresh copy of Mac OS X on there for you.
With 17GB of data, I'd go with a cheap external USB HD. Even a 250GB drive is pretty cheap these days...well under $100 if you shop around. It's wise to always have your data backed up at all times anyway.
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