Well it's possible to break out of a chroot jail (done it myself, when I needed to break out of a chroot'd remote Gentoo install over ssh for some odd reason. It's easy if you allow access to enough stuff to compile and run a c program.), but you can make it very difficult to do so if you setup the chroot enviroment effectively.
If you want to keep things completely seperate then emulation isn't that bad. You can go with VMware, but there are other way so to run Linux within Linux that have very little performance penalty.
Personally I would stick with chroot and just go thru the steps to harden it. This sort of thing is well known and there are lots of howtos and stuff on how to properly setup a chroot jail.
If you get a VM Linux cracked, how much do you gain over a real Linux OS?
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Another thing for security you can check out is SELinux. SELinux is now setup and used by default on Fedora Core3.
They don't have a very complex and strict setup by default, but certain important services are setup using SELinux's mandatory access control. Then they also have very strict rules setup that you can optionally use.
Fedora Core 3 SELinux FAQ
Just a FYI.