I had almost an identical problem to this just the other day, using a Seagate 250 GB drive. I had to drop using their software to partition the hard drive. XP was able to do it fine. See if this would work for you too: right-click on My Computer, select Manage, select Storage, then double-click on Disk-Management. Under there, it will show the partition you have, and next to it it should show the unpartitioned space too, IIRC. Delete the partition your software made (I think you right-click on the partition, and select delete). Then just make a new partition, and select the maximum space.
Hmm. I just reread your original post, and it sounds like you're installing your OS on this same drive, yeah? I'm not sure how you'd do it then. I was just using mine for back-up storage, so I could delete the partition, but you won't be able to do that if your OS is on there.
I've heard people recommend around 10-20 GB for the OS. Maybe make a partition of that size for the OS, then go and repartition the rest so you have all the space available.
Hopefully some of this helps.
EDIT: BTW, I've heard others mention that slipstreaming SP2 with the XP CD might allow you to install with the maximum space, but I don't know if it's been tried by anyone. That might be another avenue if you want one big drive--let us know what you try.