Don't use WinME, as that is biggest peace of ^$#&$ <--put bad word here
WinXP will operate on 128Mb, but it will use swap (pagefile) a lot, which slows down overal performance.
If you like to play with partitions, then don't do it on system partition, as that might create problems. Use second HD. I am sure that you will be able to make it work with Boot disk, but your computerr still might be overkill for DOS games.