No point in upgrading the CPU unless you have a 64 bit capable motherboard - so you may have to upgrade both.
I recently did this and found that it was a waste of money at this time - very sorry I did it.
Yes you can use the 32 bit Windows XP on the system but you get no improved perfomance as it cannot use the 64 bit capabilities. Thus no point.
MS Win XP 64 bit Edition is a waste of money as there are very few drivers for it and you will often be reduced to using generic MS drivers without the extra capabilities of the fancy manufacturer drivers. The MS OS will automatically kill off any 32 bit driver for which it has a generic 64 bit driver that looks like it may do the basic requirements. An example being the 5 button MS Intellimouse that I have - when I loaded the XP 64 bit Edition I also reloaded the 32 bit fancy driver that allowed me to use all 5 buttons. The OS automatically killed the 32 bit driver and loaded a 64 bit generic 3 button driver and would not allow me to activate the 32 bit drive at all. In the 4 months since, after many complaints, MS have finally released a 64 bit driver for the mouse, but the system should have allowed the user to over ride and use a 32 bit driver if the wanted to.
My research has shown that if I want to get the best out of a 64 bit cpu at this time you need a 64 bit board, an AMD 64 bit CPU, and one of the latest major distributions of Linux as there are far moe Linx based AMD drivers for 64 bit than any other flavour. If you are not going this route don't buy 64 bit as it is a waste of money.