You'd get better quality if you went from the uncompressed source directly to 128 kbps rather than going from 320 kbps to 128 kbps, but if you no longer have the source material you have no choice. I would use
CDex to do the conversion. If you're going to listen to these tracks on an Mp3 player with ear buds or on a PC with average speakers you're probably not going to notice any difference.
But my question is why bother? With most Mp3 players being 2GB or higher and with cheap large hard drives the amount of space you'll save will be insignificant.