You have asked multiple questions, which have varied answers.
First, let's clarify...you have a boxed set for Mandrake 7.2 and you want to install it on your main system? If so, I agree, Mandrake 7.2 is too old and will not be a good choice. Most Linux distros come in free versions that you can download. Most also have Live cd versions that you can try first, to see how well they work on your system. Your system must have the ability to boot off of cdrom to use such live versions.
You did not mention what your system is that you want to install Linux on. Giving some information would help...how much ram, processor on the system and what make video card would help determine what Linux distro (flavor) is best to try.
You can format a second partition ahead of time, or allow the distro to take free space on the drive. if formatting first, make a fat32 or ext3 (linux) partition.
Yes, install XP first, then defrag the XP partition before installing any flavor of Linux, so that you assure that any files that may have found there way to the outside portion of the partition are moved back and defragmented.
The ability to use a USB keyboard at boot is a function of the bios and must be enabled in the bios for a USB keyboard to work at boot. knowing what system this is would help us determine if such support is available on your system.
The newer linux versions will support most USB keyboards, as XP does, once the OS is booted.
In terms of large file support, NTFS filesystems are needed for windows in files that are over 2 gig in size, say iso images.
Linux filesystems don't really have this limitation. The issue is that generally you can't reliably write such large files to NTFS partitions from Linux.
Giving step by step instructions to install Linux is not reasonable to expect on this thread, but such manuals are available online for each distro. Most newer distros are easy to install and don't need too much instruction to do so. However, reading up first on installing a particular distro is always advised, especially for a first timer.
Dual booting XP and Linux should not be a problem, as most distros set up such an environment for you. Once you decide which distro to try out, then we can guide you more easily.
Besides PClinuxOS, there are several others that are good for first timers, such as Mandrake 10, Linspire and Suse 10.
If you want to try out a smaller sized distro, then Puppy Linux is a favorite of mine.
Try looking at
Distrowatch to get an idea what is out there.