I use a 250gig drive with XP SP2 without any problems and others on this site use much larger drives.
Yes it is just the original version of XP that has this problem with not recognising drives over 160GB. SP2 and I believe SP1 fixed this problem.
The major problem in this, that i was referring to. Is if you have only a recovery disk or only a install disk of standard Windows XP. Then when you do the format with this version of XP planning to update through windows to SP2. Can cause major problems.
As this can cause haywire with your drives if they are over 160GB as when you do the format or do a system recovery to non SP2 standard windows XP. Your drives can very possibly become corrupted and loose your info. They will definitely become non recognised by windows.
Plus you cant (easily) format and install windows onto your drive in the first place if it is your C drive that is over 160GB. So doing a recovery onto a drive that is over 160GB will cause problems. Installing Windows XPSP2 direct from a format will solve all this.