I ran through this and have one solution that worked for me. But to start, you MUST have SP2 installed on your Windows XP in order to use a HDD partition larger than 137GB. It's what is called support for 48-bit LBA. And basic XP does not do that.
Anyway, I found a lucky solution, but it depended on two things. First, I had a second HDD (also happened to be large) that was empty - did not need anything on it. AND I had the Seagate software for HDD installs they call their Disk Wizard. You might be able to download that from their site for free.
Anyway, within Disk Wizard you go to Maintenance and choose the tools for Partitioning and Formatting. If the SECOND disk already has a partion established, you wipe out all of that so there are no partitions on it. NOTE this DESTROYS any old stuff on it! Then you tell it to parition the SECOND drive and Format it PLUS it offers you the coice to copy all your existing boot drive contents to the new (second) disk and make it the new boot drive! In my case the second drive was a twin the the first at 320 GB, so I told it to use ALL of the second disk to do this. Since it was working under XP with SP2 installed, it was happy to do as told. In a short time I had a 320 GB new boot disk. Then I simply shut down, swapped a couple cables to ensure the new boot drive was hooked up as the proper boot device, and started up again. I used the Disk Wizard once again on the original boot drive to wipe it clean and re-partition it to one large volume.
Now, in your case, even if you don't have a second twin HDD, you could do something similar. Duplicate to the second drive and make it the new boot, then swap as I did. Then repeat the process to wipe out the original drive and duplicate back it, but this time it WILL re-partition to the full drive size in one volume if you say so. Swap once again, clear off what was originally the second drive, and do with it what you will.
The root of this is that XP will not handle a volume over 137 GB without SP2 installed, and Seagate's Disk Wizard knows this and refuses to make a too-large partition until SP2 is there. Once you have SP2 installed, Windows can extend a drive partition to include adjacent capacity on the same phyical hard drive. BUT it (and Disk Wizard) refuse to do this on a drive that is the boot drive!! Now, I don't know if other HDD utilities can ignore this last rule and do it anyway. But Disk Wizard did allow me to solve the problem IF I had a spare second disk to turn into the new boot disk.
1. You do not need SP2. That is a pervasive myth. You need SP1 or higher. The only version of Windows XP with this limitation is the RTM (no service packs) version.
2. The 137GB limitation is not Windows XP itself, it is the 28-bit LBA ATA driver used in Windows XP RTM. This means that drives >137GB are fully supported on SCSI and RAID interfaces, but not PATA/SATA.
3. Partition Magic and other 3rd party DOS tools can expand partitions on the boot drive. This is often the easiest solution if you have these tools available.