Can a Guest Windows XP account infect the overall system with Virus?
Yes. This is possible through various security exploits. Windows Updates help close design flaws that exploits exploit. So run that frequently and that'll help prevent this kind of abuse.
Under regular use, a guest account should be fairly incapable of ruining the system. However, if they have physical access to the machine, then they can easily boot off another device (usb, for ex).. Then use easily available utilities to crack your admin password and do other entertaining things you'd rather prevent.
-- Ammendment --
I'll add that a under-skilled user can do this inadvertently. So the integrity of the content they consume matters. If they're going to really sketchy websites, they could unknowningly run an exploit that owns the system and uses it for whatever (like a spam botnet).