You can delete the virtual machine files. They are located in the Documents/Parallels folder. You can also make backups here by copying the virtual machine file to another location and/or name.
To install a fresh copy of XP, from Parallels menu, go to File -> New. The wizard will be launched. The wizard example is Win7 but you can install any OS as per comments on the install screen.
You can remove the virtual machine from the Virtual Machine List window. It will ask you if you want to move it to the Trash. If you click no, it will be removed from the Virtual Machine List and remain in the ~/Documents/Parallels folder. If you click yes, then it will be moved to the trash. In either case, you can then move it elsewhere or erase it.
