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In my system, a while after starting Windows 7 the display will stop working, the system hangs for a second or two and then comes back with a message:

NVIDIA display driver stopped working and has recovered

This keeps happening repeatedly and I'm facing a lot of problems as a result. Any idea what is wrong?

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Ah yes, good old Timeout Detection and Recovery. This bug can be triggered by a ton of stuff and as such the solutions vary quite a bit.

What Tog said is a good first (and hopefully last) step. In most cases TDR kicks in when it shouldn't which is why it's technically a bug not a feature. If you've ruled out harware or driver issues, as a last resort you can either keep the theme basic and see if it helps or change the TDR settings.

Since they removed the controls from windows 7 you'll have to manually add them back in so don't try this if you don't know what you're doing. Using regedit enter the following keyvalue

KeyPath   : HKEY_LOCAL_MACHINE\System\CurrentControlSet\Control\GraphicsDrivers
KeyValue  : TdrLevel
ValueType : REG_DWORD
ValueData : TdrLevelOff (0) - Detection disabled 
 TdrLevelBugcheck (1) - Bug check on detected timeout, for example, no recovery.
 TdrLevelRecoverVGA (2) - Recover to VGA (not implemented).
 TdrLevelRecover (3) - Recover on timeout. This is the default value.
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I've had this bug before, most of which under two circumstances:

A.) My machine was over-heating, especially the GPU; I just pumped up the RPM on two of my case fans.

B.) I recently had a bad OC; download MSI afterburner and reset all the settings to default. Check your thermal settings while using a CPU intensive app (rendering and or compiling would suffice).

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Update the driver to the latest version, if it already is, try rolling it back to the previous version

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