Very probably.
Some older MBs had limitations as to how big a drive they could support.
Most drives came (come) with software that eliminates it. I've never used it, but it does work.

As a note the drive will probably also come with cloning software. So IF you want you can clone your existing drive to the new one, and get rid of the old one.

I would recommend though leaving the exisiting drive in and (assuming you get a 1TB drive) partition it as 2 500 gig drives. You can do it directly with XP, the EASEUS software is excellent too.

Use one partition and move your data to it, you will have to slowly redirect the programs to use it as the default directory. In Word or Excel for example in the tools, options screen there is a default directory setting. Most programs have it.

Then use the second half and backup you computer to is. (not a perfect setup as it is on the same drive as part of you data, but better than nothing). Get Acronis or a good shareware backup program and set it up to backup your exisiting drive and the new data partition to it nitely, weekly whatever suits your needs.

Most likely. Why not upgrade to Windows 7? Its WAY better.

No opinion on Win 7, although I do hear it is very good.

But the OS, at least since Win2k, has no barring on drive size.

Well XP has a limit, but it's a lot bigger than anything produced today.