The recovery will wipe any partitions on the drive except itself.
It didn't happen that way with Windows 7's recovery method. It only formatted the partition that Windows 7 was on. It didn't wipe my data partition, nor the 25GB one I have reserved for XP Mode (to keep it from scattering all over the disk), nor my Linux installs.
It only formatted and reinstalled Windows 7 on the first 70GB partition (& the 100MB one) of a 1TB Caviar Black. But the thing about that is, 7 is installed first. Win 2K is not, on the notebook. That's the problem. Like you said, it would be wiped out by XP's reinstall option.