Windows 7 - Reuse old XP PC HD as USB drive. Choose to boot from it on new PC?

My old XP PC power supply died. I want to take the HD out (from which it booted into XP) and put it in a USB external case. If I then plug this into my Windows7 PC, can I choose to boot from the USB drive, so that I can have an XP computer when I need it? This would be a real help to me since I have some old software that will not run on Windows7, and I really need to use this old software.

NO, not as a USB external.

Dual Boot Installation with Windows 7 and XP
Windows XP Mode - Install and Setup

No it would not not work that way..
You can install windows XP on the same hard disk on which windows 7 is but in a different partition.
If you do it this way then when you would turn on the system you would get an option to choose in which os to boot.
Moreover if you have some software's that would not work in windows 7 you can try the "Windows compatibility mode" and it might make the software's work in windows 7.

What about using Windows Virtual PC. I haven't use it yet under Windows 7, but I tried it on XP.

I have tried compatibility mode but it will not run at all. Another thing I tried was to install an XP virtual machine, however I don't have the original XP install CD(s), only the upgrade from Windows ME, and it tells me it's not a valid registration code, so XP won't continue to install on the virtual machine.

If I install the old HD as a second internal drive, would the new PC have the option to boot from that at startup?

If you have Windows 7 Professional or higher, both XP Mode and a complete virtual machine containing XP with SP3 are a free download from Microsoft.
Otherwise, if you do have a valid XP key, you could try to find .iso images of XP online and use them to install it.

Using the old HD as a second internal drive may work provided everytime you want to use the old one, you have to change the old one as your primary boot and the Windows 7 disk as a secondary drive in the BIOS. This is of course if your BIOS is capable to do that, or else you may need to open everytime the case and physically change the dip switch settings on the 2 drives.

Corazon, I have Windows 7 Home Premium 64 bit only. The old HD is in my old PC right now. It originally shipped with Windows ME, but it was ready to upgrade to XP as soon as it came out. I got the XP CD's at that time and installed XP as an upgrade from ME, but it seems that it didn't ship with a valid key. When I got XP installed on a virtual machine, I couldn't get it to start until I provided a key and that's when it said it wasn't a valid key for XP. I don't know what all that is about, and I don't have any original ME cd's because that was pre-installed when I bought the old PC.

Shouldn't you be able to do a clean install with the XP upgrade disc as long as you feed it the ME key? (I'm actually asking, I don't remember if Microsoft allowed it back then.)

You will need to insert your Windows Millennium CD.