UPDATE: This instructable is about 5 years old now, but this error still persists. While anything could be causing this, as the steps will show, overheating and driver errors are a dominating problem. Dusting out your computer, and following the "drivers" step would be a good place to start.
This instructable will show you known ways of fixing the dreaded "display driver nvlddmkm stopped responding and has successfully recovered" error. It's been found on operating systems XP, Vista, and Windows 7. I've searched hours and tried many solutions, finally #1 worked for me.
Please note that this also works for other forms "display driver__________ stopped responding and has recovered," however this is the most common. I personally had that, until getting a GTX 260, in which case I got "Display driver nvidia windows kernel mode driver has stopped..."
What is this error? This error occurs when your computer thinks that you graphics card has stopped responding, mainly due to a low frame rate. The program that controls this is called "Timeout detection and recovery." The error is very vague, and doesn't correlate to one problem. Getting this error is like your computer saying "something went wrong with your graphics card, and we're not sure what." It could be you're power supply, ram, temperature, or just the card in general. It happens on all types of cards, and even built in ones, with your motherboard. You will know you have it if your monitor goes black for a few seconds, and comes back, with the popup from the intro picture. If you have only gotten it one time, just ignore it, but if you get it again, you should try the solutions.
Forms of the error
There are a few known forms of this error. Sometimes it will just happen once, normally while watching a video or playing a game, other times it will go berserk, right when you login you will get it every 10 seconds, and may even get the blue screen of death!
Now that you know a little about it, lets continue to the solutions, I'll start with the easiest first, and move up to the more drastic.
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Make sure that you are on High Performance, in the power options section of the control panel. More specifically, make sure that the PCI express setting is turned OFF. This would fix any issues caused by low power to the video card.
If you are still getting the error, proceed to the next step, this applies to all solutions.