Generally you need to have some percentage spare space for the drive to decompress files/stick additions on.
Some testing has actually shown that defragging can slow access compared to a moderately fragmented disk (think random access).

Partitioning is much less important with later versions of XP.
NTFS file system has less issues with big partitions than fat32 + early on XP had issues if you gave it a boot partition bigger than 10GB (I think, may have been 4GB)

Primarily I keep a 10GB partition for Windows & swap file but install games on a different physical disk.
Other programs/data go on either other disk or the other partition but never in the windows partition.
This way I can reinstall windows at will without loosing important data.