It could be slow for a couple reasons:
1) If files are stored not close to each other, for some application, when you try to load it, it will take longer. Fragmentation issues. Harddrive heads take a long to move.
2) The virtual memory on ur system is larger than ur physical memory typically. This rest of virtual memory (after physical) is in the harddrive. Again, if the "virtual memory" is fragmented, it can also lead to system slow ups.
3) If there isn't enough space, I would imagine that the system wouldn't allocate a lot of virtual memory in the first place. While this is an operating system issue and it's interaction with the applications, I am presuming this would lead to applications not being able to start if there isn't too much "virtual memory".
I am not an expert of "Windows XP". I just gave you some theoretical background that should be applicable to "most" operating systems - including XP.