Ok, i will try and get all of these answers in one post:
Yes XP is a system partition, since it will detect an OS on the drive, but removable any way.
Yes, i suppose i should have mentioned that the MBR will be located on a single partition, thus you will need to either be careful about which partition is loaded first. Also running the MBR restoration from the vista disc, should be able to fix this.
It should not matter what drive letter is on the main OS, my laptop runs XP from an E partition. Just be careful to restore the MBR, with no OS on the C: partition, it is good to keep in mind that your boot.ini file will still be there, hidden.