Possible, but unlikely. There's a lot of complete and utter nonsense floating around the Internet about how you need X amount of free space or performance suffers. Most of it is based off of what you might call a lie of convenience. If you think of Einstein's famous E=mc2 equation, to really understand exactly what that is saying you need to know a bit about the Law of Conservation of Energy and how energy can't be created or destroyed, only change forms, which in turn gets into a bit of Thermodynamics and the c2 part gets into relativity, so by the time you reach the end of the rabbit hole, you have practically taught a semester long physics class. So rather than explain all the details to people who wouldn't understand them anyway, more than a few technicians just gave people a simple rule of thumb to follow, which then became gospel to the people told to follow it.
The only time a lack of free space makes a difference is if the OS needs more than the available amount of free space for the swap file. Otherwise it doesn't matter if every single last byte of space is used, as long as you don't need even a single byte more, you're good. There is no magic threshold of space beyond the rather easy to understand one of the OS needing X amount of space, the drive only having Y free and X > Y. That triggers something known as thrashing and while this is another one of those cases where it's not entirely true but it's easier than explaining the full details, the only cure is to reboot. This can also be triggered if you followed someone else's outmoded advice and manually set a size for the swap file because some random person claimed that it would make the computer faster. How simply limiting the size of a file changes the physics of physically writing data to a HDD I will never understand, but apparently most people never stop to even consider it that one extra step,
So, I'd be much more inclined to go with Bob's earlier idea that it was some update that went awry or even that your XP VM was infested with some kind of pest. You should also double check the VM settings. Maybe someone tinkered with them and is starving the VM of RAM. I don't know if I've ever seen much slower of a system than someone trying to run XP on only 256MB of RAM. I remember back when XP was just coming out I was helping out at a local university getting the brand new computers of incoming students to the dorms ready for use on campus. You could always tell the systems that only had 256MB of RAM because they would take FOREVER and a day to do anything. A VM's overhead could easily eat up a good chunk of the increased efficiency of CPUs since that time.