If my memory serves me right, XP, (no service packs), doesn't recognise drives over 127 GB. XP's Service Pack 1 fixed that.
Did you allow the XP Setup routine delete and create partitions? That is the accepted way.
I recently tried re installing XP to my old computer because it was slow and almost unusable. I got out my disk, booted up into the windows installer, deleted my old partition and had to make a new one. I have a 320 GB Hitachi drive. However, when the program asks me how much I want to use for windows xp, the max amount allowed is only 127 GB. I thought this was weird, but I continued on with the installation. When I finally booted into the desktop, my HDD only showed 127 GB available. There was no unallocated space for the drive or anything like that. It just said that the drive was only 127 GB. So I thought to my self: "Maybe it is formatted wrong?" So I went back through the same process and re installed. Same result. Then I booted up into my linux mint live cd and reformatted there. The disk analyzer there said that my HDD was 320 GB. The bios said that the HDD was 320 GB. So why does XP refuse to use the whole hard drive?