Clear all your temporary files using the Disk Cleanup Utility. You will be amazed how much space this can free up from old temporary files. When you view the total space used/free on your hard drive normally, it does not always include a lot of the temporary files already on the computer for certain programs. Additionally, Photoshop does use a ton of space for temp files when working with larger files, more than you might think. I'd say if you are seeing only 40 GB of free space on your computer, then yes it's because your drive is "full" by fragmented and temporary files. Again, there are ways to help take care of this and give you a little extra room.
First, do a Disk Cleanup as I mentioned before, and remove all temporary internet files, setup files, and old temporary archived files if possible. Second, do a full disk defragmentation of the drive. Third, go into Photoshop and just double check the preferences set for the scratch disk.