I can't see any reason why it shouldn't be plenty quick enough. I've installed and run XP sucessfully, and plenty quick enough - on much lower processor speeds than this. But don't take the RAM any lower.
I've built some Celeron 1.7s with 512 Mb recently (100MHz fsb too) - and they run nice and quickly.
It will run well. I had XP on a Duron 700 for a while and have successfully run XP on a miniature desktop computer with a Celeron 400 and 192 mb of PC66 RAM. It didn't set the world alight of course, but it would perform all routine tasks including running graphics editors satisfactorily. It even ran a USB TV capture device with reasonable TV motion on the desktop.
Will try to shed some light on your question. One of my machines has a 1.0 gig duron with 256Mb of sdram, running x\p pro. It copes very well with it.
It never seems to lock-up and the slowest I have seen it work is on video editing(Windows task manager- performance says the cpu is running at 100% and that all ram is being used)when editing.. But this does not seem to increase the cpu temp, it still breezes along at a steady 40c.
I am pretty sure a duron 1.6 runs with a 133mhz FSB which means you can run ddr 266 quite well and in sink! Should run XP just fine. If your really worried plub an extra ?10-15 and get an Athlon XP1900/2000. But a 1.6 Duron should be more than OK.
For day to day, More ram would be ideal. 512 is ideal for XP.