Having used many distributions of Linux over the years, including completely build your own varieties such as Gentoo, I would personally say for a complete newbie either Ubuntu or Mint (which uses Ubuntu as a base on one of its versions) are the best choices. Others will disagree on this while others will agree. The thing with Linux is there is so much variety within it that there is something for everyone pretty much.
One thing you may struggle with is WI-FI as some chipsets are supported within Linux natively. While lots of chipsets aren't and will either need stuff compiling, not good for newbies, or require odd workarounds using Windows drivers.
So for your questions
1. What type of Linux would be the most widely compatible and still good on a system from about 8 years ago (specs above)?
Lubuntu is going to the most compatible out of the Ubuntu flavours. If your feel adventurous then maybe look into something like Puppy Linux. I had this running on a crappy netbook with very little effort.
2. For my purposes (gradual immersion), should I create a partition on the 160GB hard drive for Linux, or buy a 32GB or 64GB USB stick and install on that?
Live distributions, that is a version that runs off CDs, DVDs or USB sticks, is a good way to go. Most distributions come with Live variations and are a great demo of how things work within the system. Just expect limitations and slow performance as it reads off things like CDs and DVDs. If you like it then generally it is a easy case of clicking on a icon and following some install instructions for the newbie friendly installers.
3. Any tips or good guides on creating a dual boot system?
Make sure something like GRUB installs, generally it does automatically. So long as you don't mess too much with the installer, going for custom installs, it should pickup windows fine and setup a dual boot environment.
5. Any tips on creating a Linux partition on a hard drive WITHOUT having to destroy and re-install the XP partition that already exists there (i.e. Swissknife?)?
Most installers come with a partitioning tool. However if it doesn't then you can use any partition tool, even within windows, to slice up the drive and get it ready for Linux. Before you start I would recommend watching videos and reading guides because if you do it wrong you will kill the Windows partition and lose all your data.
6. Any complications or pitfalls I need to watch out for on a dual boot system?
When it comes to getting rid of Linux, if you feel you don't want it any more, then it is a pain to do. So before you decide you want Linux then try, try, try and try it more using live media and even using virtual machines.
7. Are all Linux strains compatible? I don't want to be stuck with a Linux branch that can't run common binaries.
Anything for Linux will run on any Linux flavour. The package installers vary depending on distribution, commands and such. But generally the package managers have pretty comprehensive repositories of software. Updates filter through flavours pretty quickly. If you want something that is not in them you can do a manual compile. This is a bit tricky but doable.
Windows stuff however won't work without something like Wine. But this has it's own pitfalls and not all Windows software will work. But if your mainly using XP stuff then it shouldn't have too many issues with basic stuff.
8. In future, will I always need a Windows XP partition to run my legacy Windows XP applications, or is Wine under Linux good enough now?
Wine is not perfect. Don't let people tell you otherwise. It's getting better but some stuff simply either wont work or will be buggy. If you rely on Windows software then keep the Partition.
