It's sad that that CPU is suffering because of RAM. In it's current state, I'd say XP like others said; unless you want to go with Linux.
You can get 1GB of RAM in the UK for about £10 and they're easy to install yourself, whether you have a laptop or desktop. Then you could go with Windows 7.
It depends on what's being done. With the state of most browsers at the moment, 512MB of memory is getting pretty bare. 1GB will make a world of difference, even in XP. Windows 7 is a waste of time on such an old rig, as you're spending too much cash on the license.
If you're comfortable with Linux, then a lighter distro might be a decent option, providing it does what you want, but the lighter distros are generally the less newbie-friendly. As Speedygeek said, Mint is probably a reasonable compromise. It's very polished and intuitive, yet they seem to have cut down on Ubuntu's bloat.
Either way, if you do try Linux, get something recent, as there have been quite a few updates to the memory management side of the kernel over the last few months.
tl;dr - Feel free to try Linux, otherwise stick with XP.