You have (had) everything hooked up fine. The very fact that you can see the HD on your desktop, and access its contents, shows that you have terminations set right, etc. It also shows that the drive is basically ok. You can leave the ID at 6 (it shaves a couple of seconds off of boot time), or go back to your original value of 2. N'importe.

Here are some things to try:

1) Reinstall the system. It could be that you simply have a damaged system folder.

2) Reformat the drive. It could be that the system folder is damaged because you have a bad sector. Since it appears that you don't have too much on that drive at the moment, it doesn't seem like you'll be wiping out too much of value. I'd recommend doing this just as a matter of course in this case, prior to step 1).

3) Try power cycling the drive after it's already gotten up to speed. I've had problems with older drives that had developed slow startup due to incipient "stiction" or degraded bearing lubrication. The firmware on the controller expects things to happen within a certain time, and a slow spinup can cause boot failure, without preventing mounting. Once it's spun up (and all disk activity has ceased), power down long enough for the disk to slow its rotation considerably without stopping, and then power back up. Then, power the Mac off and back on and see what happens.