TrevorH-- Thank you. This is good info. I did manage overnight to use a related parameter " enforcing=0" and got the problem resolved. It turned out to be a little more convoluted than expected . Will describe things here for those interested.
After "enforcing=0" as above, boot continued normally, pausing 5 min. while the 'Strict' policy relabelings were set, per my (pre-panic) policy change. Got to desktop, the AVC popup advising in a detailed window the processes which would be stopped if I allowed sys to reboot into full enforcing-strict mode. About twenty items listed to be blocked if I did not go back to prev. "Targeted" Policy. These included smartd, gconfd and scim-panel-gtk, mostly to prevent them from accessing 'mislabeled' files. The saved AVC text reports only show a few of the rejected processes for some reason. After rebooting back into the fully Enforcing/Strict condition, got past the GDM login, then (now black screen) xserver would not start. Tried 'startx' and got rejected by PAM for Permissions. Root login also rejected. Restarted back to your GRUB-edit trick to go back to my original Enforcing-Enforcing-Targeted settings. On restart, SElinux refused to give-up its Strict status and screen went black again after login. Figured I'd just turn off SElinux and reboot a few times to give the policy labelings a chance to take. Finally, with things running normally, I set my SElinux Admin Panel back to where I had it at the beginning, Enforcing-Enforcing-Targeted. This time it worked. Apparently SElinux has to be nudged gradually into and out of any strict policy alterations. I don't think many users will have luck using "Strict" Policy setting. Best hope is that default Targeted restrictions will gradually include more processes than the present (200) with CentOS 5.7. Possibly v6 of the distro will have a hotter SElinux default. I'm hesitant to install anything higher than v5.7 since I'm running an old sys. Thanks again, BH