I agree with Reiso.
Personally, I back everything up to external media (DVDs, or an external hard drive) and don't generally trust recovery solutions stored on the same drive - for one thing, if the drive fails, that's your data and the backup gone bye-bye.
As for dual-booting XP and Vista, the only real reason to do this would be if you have the 64bit flavour of Vista and want to run applications that are happier in a 32bit/XP environment. Though this scenario is gradually becoming very rare, there are (for example) some banking/accounting applications that appear to be a little behind the times, or hardware without Vista compatible drivers (most fingerprint scanners).
I would not attempt to install to drive E:\ without first erasing and re-creating a partition specifically for Windows XP (in fact, as you've discovered, this probably isn't possible anyway). Before doing this, I would also ensure that the E:\ drive is not the active boot partition - this has been the case on a small number of laptops I've worked with in the past, where the restoration partition contains the boot manager, and removal can cause issues. Sony's Vaios are particularly annoying in this respect, and have caused me the most headaches of all (especially as some appeared to have hardware designed only for Vista, and no official XP drivers existed at the time).
As it happens, installing XP after Vista has its own issues anyway, and you'll need to repair Vista's boot environment post-install either way.
In most cases, I've found that installing XP, repairing boot with the Vista DVD, then running VistaBootPRO (easier and quicker than playing with BCDEdit) to add XP to the boot menu can all be done quite quickly... but snags are not as rare as they should be. o.O