When Windows installs it only can create a max 127Gb partition without Service Pack 1(or 2). Once its installed you can expand the partition with something like Partition Magic to the full size, after installing at least Service Pack 1. Or you can create a second partition on the drive using Disk Management in XP.
You can also use a third party utility to paritiion and format the drive prior to installing Windows XP (without SP1). These are usually free from the manufacturer of the hard drive.
This all assumes your computer's BIOS can see the full size of the drive. If it cannot you need to update your BIOS. After updating the BIOS you will still need to reinstall Windows, use Partition Magic, or create a second partition to get the rest of the space back.