Taking the hard drive out to put into another machine in order to freshly install debian is often a very workable solution, however, in your case, where you are unlikely to have another machine of the same architecture to drop the hard drive into, this is a lot less convenient. This is still possible using debootstrap, but debootstrap doesn't do a full installation. it just installs some packages, you are left to do a lot of the renaming stuff that the installer would do, like setting up /etc/network/interfaces, /etc/hosts, /etc/resolv.conf, /etc/hostname, installing a bootloader, and kernel.
Upgrading from etch to squeeze is a definite possibility. Just note that there was a lenny release which you should not skip on your way from etch to squeeze.
here's what I'd recommend:
Note first that the current etch repositories have moved, since, it is so far beyond end-of-life. the current etch respoitory is this:
deb http://archive.debian.org/debian etch main
use just that, then
apt-get update and
apt-get upgrade then
apt-get dist-upgrade to make sure you are up to date with the latest etch. Then upgrade to lenny by following chapter 4 of the lenny release notes. Keeping in mind that also lenny is past end-of-life, so the repository for lenny is now:
deb http://archive.debian.org/debian lenny main
So use the above repository when you get to section 4.4 of the lenny release notes. After upgrading to lenny, you should be able to upgrade to squeeze by following chapter 4 of the squeeze release notes.
These instructions in the release notes might seem much more complicated when compared to some advice you'll get to just "change sources and dist-upgrade", but we've arrived at these instructions through lots of independent testing, and these instructions should have a much greater probability of actually leaving you with a working install.