After a similar "nutty" experience of a number of attempts to load XP under Parallels on my new iMac, I searched this forum and your suggestions sorted me out and am now up and running with XP SP3 plus updates, thanks all. Here's a summary of the steps I took that worked for me.
1) Install XP
My initial attempts at installing XP would hang part way through or, if it did install, the installation appeared flaky (ie. on boot up, it decided there was something wrong with the 'drive' and ran the chkdsk process automatically)
I deleted the VM and followed Silversorcerer's suggestion - On creating a VM, when you get to the dialog box and enter the activation code, go to "advanced" screen. Lower the RAM from 1 G back to 768 Mb. Re-install XP and it all worked fine. Take a snapshot to save the VM at this state.
2) Install SP2
I ran Windows Update to install this but, even though the download is large, it seemed to me to take far to long and I felt the process had hung. So I went to this site using Safari and downloaded and saved the full SP2 distribution (handy in case you have issues with later steps and need to install SP2 again without having to re-download it):
http://www.softwarepatch.com/windows/xpsp2.html
(Note: do not click the big "Start Download" button - that's to run some free scanner software - the actual link is below that in small text that reads "[Click here to Download]")
Initially, on executing the download, I had issues installing SP2 (I got a pop-up that said something like "bad memory reference" or "memory out of bound error", either way it was bad). Again I followed Silversorcerer's suggestion - when the icons appear at the bottom of the window, disconnect the shared "spiderweb" (network) icon until installation is complete. Take a snapshot to save the VM at this state.
2) Run Windows Update
I re-connected the network ("spiderweb" icon) and ran Windows update which found something like 74 updates. Many were SP2 fixes that appeared to be necessary to be installed before continuing on to install SP3. Windows Update ran fine this time and did not hang. Take a snapshot to save the VM at this state.
3) Install SP3
Like SP2, I didn't bother using Windows Update to get SP3. Using Safari, I downloaded and saved the full SP3 distribution (handy in case you have issues with later steps and need to install SP3 again without having to re-download it):
http://www.softwarepatch.com/windows/windows-xp-service-pack-3.html
(Note: do not click the big "Start Download" button - that's to run some free scanner software - the actual link is below that in small text that reads "[Click here to Download]").
I executed the download, with the network ("spiderweb" icon) connected this time, and it all installed fine. Take a snapshot to save the VM at this state.
4) Run Windows Update
I ran Windows update which found something like 12 updates. Windows Update ran fine this time and did not hang. You should now have a complete install of XP SP3 plus latest updates.Take a snapshot to save the VM at this state (you'll want to keep this snapshot long term) and you can probably go back and delete any snapshots prior to this one.
I hope others find these steps helpful and again thanks to those would made the suggestions above.
Cheers.