The below table is from the Microsoft Developers Network website.  Windows XP can address 4 GB of RAM.  Beware that this limits total usable RAM to 4 GB (including RAM reserved for Video on your video card, as this must be addressed by the OS).  32 bit XP Home will use about 3.2 GB, but can load memory resident executables and video ram above this limit.  Again, the sweet spot is 4 GB installed as, while it will not all be used, you will have the maximum available before inevitable swaps to the page file begin.

Physical Memory Limits: Windows XP

The following table specifies the limits on physical memory for Windows XP.

Version Limit in 32-bit Windows      Limit in 64-bit Windows Windows XP 4 GB                                                       128 GB

Lotus 123 ~ S-Render ~ OS/2 WARP ~ IBM 8088 / 4.77 Mhz ~ Hercules Ultima graphics, Hitachi 10 MB HDD, 64K RAM, 12 in diagonal CRT Monitor (16 colors / 60 Hz refresh rate), 240 Watt PS, Dual 1.44 MB Floppies, 2 button mouse input device.  Beige horizontal case.  I don't display my unit.