Yes xp can have an issue if the hosts list gets too big. The advantage of using the hosts file is it's 2 way blocking.
"Editors Note: in most cases a large HOSTS file (over 135 kb) tends to slow down the machine. This only occurs in W2000/XP/Vista. Windows 98 and ME are not affected.
To resolve this issue (manually) open the "Services Editor"
Start | Run (type) "services.msc" (no quotes)
Scroll down to "DNS Client", Right-click and select: Properties
Click the drop-down arrow for "Startup type"
Select: Manual, or Disabled (recommended) click Apply/Ok and restart"
full description of hosts here
http://www.mvps.org/winhelp2002/hosts.htm