What prevents continued hashing of a key from being used as a cipher when xored with plaintext?
This is essentially a (bad) stream cipher. It has multiple problems:


You might hit a cycle much sooner than you'd want.
It's not parallelizable - this is a large performance issue on modern CPU's compared to algorithms that parallelize well.
The key is only inserted at one point of the stream, meaning if an enemy knows only one block of plaintext it can XOR it out to retrieve the internal state of the cipher compromising all further blocks.
There is no nonce, meaning that every cipherstream will be the same.


(5.)&nbsp;&nbsp;Padding plaintext is not necessary in a stream cipher - you can simply discard the unneeded bits from the cipherstream.

However, the answer to the question in your title (What prevents continued hashing of a key from being used as a cipher when xored with plaintext?), is nothing. For example the ChaCha stream cipher works by repeatably hashing the key, nonce and an increasing counter for each block. Note that the hash function ChaCha uses is very specialized - it doesn't compress or is collision resistant, and as result can be much faster than "regular" hash functions that have much more stringent requirements.