Hi monbron, I must have been one of the minority of people where this game flowed along so well I didn't even realise that 'knocking out the nail' was timed! - & I did go on to finish the game with no problems.
I have read so many posts where players have had problems some of which I only encountered after replaying & making save games for players after I had a series of Microsoft updates or it might have been other updates for something else - I don't know!
I feel very sorry for the developers but I can't immediately think of any other timed parts in the game so if you can get past that hopefully you can progress!
The way I got to knock the nail out was to talk to William to get him to go & check the archives again & then immeidately go into the room on the left & use the hammer on the nail at the top of the picture....
NB I would be quite happy to send you a save game if you need one!