I've selected 5gb installation size in windows xp. Is it possible to consume more than 5gb in the file system alloted for ubuntu? Is it possible to expand the installation size without reinstalling the whole os?
This is documented in the Wubi Guide.
It is possible to re-size your installation size after installing. This involves resizing the partitions on your disk and is fairly straight forward. To do this you would want to use a GParted live CD or USB. (If you plan on doing this be careful! Mistakes can lead to deleting something.)
ubuntu recommends giving at least 10GB for the installation. A normal ubuntu installation will use about 2GB-3GB. If you plan on mostly just browsing the web, you will probably never need more than the 5GB. However, many applications can take up a whole lot of space once you start using them (such as a standalone e-mail browser).
If you have the available space I would say start with the 10GB recommendation.
If you really need a small installation, ubuntu can be configured to use less than 1GB. This however requires some extra work.