Because it is a more robust file system, and Windows XP is designed to
work best with it.
Also you will need to use NTFS if you wish to take advantage of
Windows XP's capabilities with respect to file and folder level
security and access control.
Before converting your existing drive please read the article by the
late Alex Nichol MVP at http://www.aumha.org/win5/a/ntfscvt.htm
There is a partitioning concern that can affect the cluster size for
the NTFS drive which has performance implications.
Personally, I wouldn't even consider using FAT32 when NTFS is an
option. FAT32 has no security capabilities, no compression
capabilities, no fault tolerance, and a lot of wasted hard drive space
on volumes larger than 8 Gb in size. But your computing needs may
vary, and there is no hard and fast answer.
To answer your questions without getting too technical is
difficult, but has been handled quite well by the late Alex Nichol in
the article here: