Actually, XP assigns drive letter C: to the active partition on the HDD at the moment of setup. (If you have two or more internal HDDs, each one with an active partition, XP will follow the SATA or PATA interface order on the motherboard, first following the sequence of their active partitions, then the non-active ones starting from the first HDD.) You don't have to necessarily install XP into the active partition, but if you don't, the system drive won't be C: - it will be some other letter depending on your configuration.
If you install XP to the active partition, its system partition will be C: when you are on XP, and some other letter when you are on Windows 7, when the reverse will happen.
My advice is to use a disk utility such as Paragon Hard Disk Manager or Acronis Disk Manager to mark the partition where you want to install XP as active. Then install it, then revert the Windows 7 partition to active and finally boot with Windows 7's DVD to repair the boot record (which XP will have messed up, since it doesn't recognize Windows 7). This way, the system drive will always be C: when you are in the respective system.
In theory, having a different letter from C: in the system drive makes no difference. In practice, however, too many programs are badly coded, and hard coded to "C:\Program Files" or "C:\Windows" instead of using the %ProgramFiles% or %windir% system variables, for example, as good programming practices recommend. And some of them won't even ask about the install folder and will only use their defaults. This causes a lot of hassle, in my case also because many of them are culturally biased and will ignore the "C:\Arquivos de Programas" programs folder or "C:\Usuários" ("C:\Users") of Brazilian Portuguese Windows. This is why I always prefer to use English versions of Windows (I have seen device drivers that go crazy with non-English versions of Windows, too).
But even better than that is virtualizing XP. I have found that I still need XP for too few things to be worth keeping a separate partition just for it. A XP virtual machine under free VMware Player is doing wonders here, with excellent performance in both guest and host systems even in my 4-year-old machine with a single-core processor and 2 GB RAM (with 768 MB allocated to XP's VM when it's running) - see specs below.