I agree its looking like something on the PS3 is screwed up. do you have access to another ps3 that you can pop that drive in and see if it formats it then? because I think unless the internal drive is working you will never be able to update because it needs to extract the PUP to the drive, then install it from there, as you probably know.
Also I find having my hdmi and the Av lead plugged in and using PIP helps some times when you think you have a blank screen when you haven't its just dropped out to the over output. With the blue screen it maybe something to do with your TV holding the last frame of video before it switches outputs in your case maybe blue. Mine is green or the last frame of TV if I remove the antenna. just a silly thought