Can I run Windows XP from a USB drive?

Xp can be made to run from USB but it’s a lot of hassle and not guaranteed. Since you have a big USB drive you can go with anything from windows 7 and up,those were made to start from usb as well. You can use imagex to transfer the installation.

Does Rufus work on Windows XP?

Rufus 3.0 is available as a portable version and version that can be installed. Windows XP and Vista users can download the previous version, Rufus 2.18, with a click on other downloads.