Sure your HDD is at fault here but before getting into any conclusion check the usual things like sata port, sata cable, sata power cable and the PSU. After this check your HDD using HDD manufacturers tool as they give options to repair bad sectors - if possible without booting into windows . If you see too many bad sectors it's better to not to use the HDD.
Once I had faced such issue just because of just one bad sector which was fixed using seatools though and the HDD ran fine after that.
If you buy a new HDD your system won't be bottlencked. The performance will improve and look for 1TB HDD atleast if you are going to get a new one.
Thanks for the comment man. I ran Error Check in HD Tunes S/w, it showed one bad sector, i didnt complete the scan though. But i had downloaded some tools from WD, it gave me some message which didnt sound good (i dont remember the message). Also, i installed Tune Up Utilities few weeks back, and ran a Quick Defragment, after the process, the HDD ran normally without any lag or freeze. But after a restart next day the same problem occured again.