well it does work on xp as long as you have sp2. also the second part above is still relivant regardless of the o.s.
most likely is that your GFWL version is out of date and cant update properly... download the latest version and try installing the game after. the error code itself is saying its a windows xp update issue. so some file on the installer is trying to update and failing... so if you already have a new copy of GFWL installed it wont have to update and just skip that step and hopefully the error.