|That's an unusual arrangement for Windows XP I must say, though I understand why it might be desirable. |
Since both partitions are essential for Windows to start, you can't modify either of them as they are. You would need to boot from a Windows Setup CD, format the C: partition, then re-install Windows on it (including the boot files which is the default method of XP installation).
Once you have the 'new' installation up and running, use Windows XP Disk Management to re-format the D: partition so it's completely empty for you to save files on.