From
The Top Eight Computer Myths!:
You don't need to defragment your hard drive very often. Modern drive optimisers like Windows 98's Defrag which position program data according to how often you use it can, indeed, improve performance a bit, but there's no reason for even a heavily used computer to be defragmented every week, or even every month. Yes, it'll be faster if you do. But the difference will probably be tiny.
Hard drive performance in toto makes very little difference to system performance, on machines with adequate physical RAM. The difference in performance between unfragmented and moderately fragmented drives is small, and the larger the drive, for a given level of filesystem activity, the less fragmentation it will suffer.
If you're using Windows NT or 2000 and NTFS-formatted drives, bear in mind that NTFS is famously insensitive to fragmentation - which is just as well, because it's hard to do
anything with NTFS without it fragmenting data. This is why Microsoft claimed for so long that NTFS was immune to fragmentation, and no defrag utility was needed at all!
NTFS performs poorly on old drives with lousy seek speed, but the trade-off is that its performance as fragmentation increases remains quite steady. Once the NTFS Master File Table (MFT) becomes fragmented, you can indeed lose performance, but how much you lose still depends on what files are where and how you use the computer. Look at overall system performance, rather than just disk subsystem performance, and the difference due to fragmentation often fades into the noise.
How much effect fragmentation has on performance depends heavily on what files are fragmented, where the fragments lie, and what filesystem you're using. Generally speaking, the upshot of all this is that frequent ritualistic defragmentation, in the absence of a significant measured performance loss (not just how your computer "feels" to you), is, obviously, unnecessary.
Fragmentation certainly can severely degrade system performance, especially on Windows machines without enough physical RAM, or which are doing very disk-intensive tasks like serious database work or high data rate video editing. Defrag weekly, though, and you're probably just going to grow hair on the palms of your hands.