I don't know anything about picassa, but can you find the pictures by doing a search in windows explorer?
It may simply have lost the connection to them.
Another thing to try would be chkdsk (check disk), click on start, all programs, accessories, command prompt and then type chkdsk c: /f press enter and follow the instructions. This will check any errors on your disk and correct them. It may need to restart your computer to complete it.