first resize your existing partition (the one with WinME) to a size that your comfortable with, and still leaves room for XP.
then create the new partition behind that one, formatting in NTFS or FAT32 whichever you prefer.
If you're running PM7 from windows, it should ask you to restart to make the changes for the already existing partition, this moves all the data around to the new size you specified (this will take some time, depending on the size of the drive and how full it already is).
Once you've got your new partition how you want it, i'd suggest installing Windows XP from within WindowsME. Make sure that you do the clean install, not the upgrade. Otherwise you'll overwrite your WinME install. There's also an "advanced" option that will allow you to tell the installer where you want it to install.
Hope this helps you out.