There is a reboot counter in "/var/local/upstart/lab126_gui.restarts" -- the contents of that file record the number of times the Kindle has unsuccessfully rebooted. After a couple of times, it goes to the repair screen.
The only way to get back out, is to overwrite the contents of that file, with the number "0" (right now it probably has a "2").
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So assuming your Kindle is otherwise fine, that should fix it. As for the potential bad block, I cannot say... the Kindle should automatically detect broken storage blocks and remove them, but really, the diags partition shouldn't be getting frequently modified, enough to wear out the blocks, anyway???
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