I would imagine that the performance would be fairly unimpressive. Flash memory has good seek times; but isn't all that fast in throughput terms. Running everything over USB isn't going to help. It could certainly be done, though(assuming you mean installing XP on the Nano being treated as an external hard drive, further assuming that Apple didn't break that function wholly in favour of Itunes).
I don't really know why you would want to, though. The Ipod is a very expensive excuse for a portable hard drive, Windows doesn't play well when transferred from one machine to another, and XP obviously doesn't run on the Nano's hardware. You'll need Linux for that.