Back up your contacts, calendar events. Or sync them to google.
I prefer to use My Phone Explorer, but as long as you back up some way, it'll be ok.
Do a factory reset. Best way. SD card will not be effected.
I suspect, some app messed up your keyboard somehow.
I have heard of a couple times, when people reselected their android keyboard in settings, and the problem went away. You can try it, but I dont place a lot of faith into it.
Of course you will lose your downloaded apps, but Market remembers your paid apps, so you can get them again.