The software firewall in XP should not cause issues with your router, but the router offers a far better level of protection so yes, you can disable it.
Some people still use a software firewall with a router as this offers outgoing request monitoring.
If you think you'll be vulnerable to accidental downloads of possibly infected files via Kazaa, WinMX, Morpheus etc, it could still be worthwhile to run a software firewall. The Windows XP firewall only features inbound monitoriing so you'd need a third party product like Outpost, Kerio or ZoneAlarm.
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