That file is part of the Lubuntu image
/home/simon/Desktop/Ubuntu/lubuntu-12.04-desktop-powerpc.iso, which Avast apparently treats as an archive and thus searches for viruses.
filesystem.squashfs in that image is not harmful, cannot and will not cause damage to your system, deleting it will not fix whatever problems you are having.
Should you still want to get rid of it, delete the Lubuntu image.
Update: squashfs is a compressed file system, which might share some similarities with a decompression bomb, but the file is there for a reason. Without it, the Lubuntu image would not work. Again, it will not damage your PC or system in any way.