Windows reinstallation is up to you. If Windows is already a little creaky, or there's not a whole lot of stuff to backup, I would strongly lean towards reinstalling Windows. It isn't strictly necessary, of course.
Hint: no Linux installer will wipe out any part of the Windows filesystems unless you tell it to. At the same time, just because Windows isn't occupying all 40 GB of space it's been allocated does not mean it's a simple matter to squeeze Linux into the second half of that drive. NTFS spreads data all over the drive, so shrinking NTFS is not trivial.
In short, you'd first need a specialized utiilty to shrink the NTFS partition from 40 GB to 20 GB. Mandrake Linux should be able to, but I wouldn't recommend it as the best tool for the job (i.e. something like Partition Magic, a commercial product). If you do go this route, defrag your NTFS filesystem first, but that step really isn't crucial in and of itself (it used to be for FAT filesystems before shrinking). A good tool like PM will handle all the tricky parts, and do a reliable, safe job. I don't want to sound alarmist, but NTFS is relatively undocumented, and Microsoft changes it for each OS release; how well Mandrake adapts to meet those changes is the concern.
Assuming you care about some of the stuff lying on your C: filesystem, you should have some form of backups already in place so reinstalling Windows from scratch wouldn't be a big problem. I say this somewhat in jest because when I recently built a new PC, backup up data and migrating was actually a chore for me. And I even had a new hard drive to use. In the end, I didn't really backup and re-use the old drive. It's somewhat of a "live" archive right now.
As far as "AUTO", Linux won't simply "take over" the entire 40 GB drive because Windows is already there. You'd first have to manually delete the NTFS partition(s), then intruct the partition tool to use all 40 GB. Since that isn't what you want, you simply have to manually create the partitions (and desired sizes), and then assign the appropriate ones to Linux. Since this requires additional knowledge, it's a bit easier to install Windows first, leaving blank area on the drive for the Linux installer (see notfred's illustation).