500g shows only 127g in my computer

Because XP did not support drives over 127 gig until service pack 1. Your original XP CD must predate SP1.
http://www.howtohaven.com/system/s [...] ck-3.shtml
This will show you how to create a slipstreamed install disc so you don't have this problem.
You could make a new CD with SP3 slipstreamed into it, using the install you have now, and then do a complete reinstall.
The only other recourse is to install XP somewhere else, update it to SP3, then mirror the image to your larger drive using a disk imaging program like Acronis.