Unless you're planning to run it virtually, you'll need to burn it to a physical disk.
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would i be able to create a new partition and install it on there?
Well thats your problem, im sure it has to be from CD
EDIT: when you boot from disk you have an option about partitions
Would it work if i had ubuntu installed and tried to install xp on there ?
This is how I installed XP, I tried everything in the end I burnt it to a disc and it worked fine :)
i just installed 7 using my USB :)