You will have certain problems to overcome. I list a few to help you research
(1) You need a full retail XP install version - some OEM version will not do.
(2) Ideally, you should have an install which already contains slipstreamed SP3
(3) Failing that, you should look into producing your own slipstreamed with SP3 (and XP SATA drivers if possible, which will avoid the need to change HDD access mode - see 5 below)
(4) You need to be sure you can obtain all the drivers for all your kit for XP 32-bit
(5) If your HDD is SATA it will not be seen at all by an XP install disc until you enter the bios and set your SATA mode to IDE-compatible - thus possibly ruining your working Win 7 install if on the same HDD.
(6) To install 2 OS platforms, you need to have two partitions on one HDD, or two separate HDDs
(7) To dual-boot XP and Win7 the most sensible approach is to install XP first, then Win7 will offer a dual-boot during install. The other way round will not work, and XP install will wreck the boot mechanism for Win7, which it IS possible to correct, but not easily.
(8) using a 32-bit XP and a 64-bit Win 7 is no problem, but you will have to install all applications twice, for the different platforms. You cannot access any shared apps, only shared data.
(9) A win32 XP will only use about 2.6 GB of your 4Gb ram. This is normal and unchangeable.
(10) It has been known that Win 7 partition cannot be accessed by Win XP due to an incompatibility with partition definitions under Win 7 (not necessarily backward compatible for no acknowledged reason so far)
(11) it would be most unwise to perform any such update before having a fully checked drive image of the current working setup.
Many people have found they can happily run games not fully compatible with Win7 under one or other of the various virtualisation packages available, so...all in all, with a currently happy system, I would start by testing the XP compatibility box within Win 7 or alternatively install and test Virtual Box or VmPlayer.