That may be the best option as a clean install would create a 100MB system reserved partiion.
You could do the following.
Create a System Repair Disk from your current install.
Create a complete disk image of your current setup using something like Macrium Free. You would first need to create a bootable disk inside of Macrium in order to restore the partition if the computer does not boot. You would save the disk image to an external drive. This would give you the option to restore the image and you would be back to where you started. With Macrium installed on a computer you can also explore the image by mounting it as a virtual drive and copy any file you want from that image.
Delete the XP partition using the Windows 7 install disk. At this Window select Custom(Advanced). At the next window you would delete the XP partition.
Reboot the install disk and at this window select Repair Your Computer. Do a Startup Repair. It may take up to three tries before the repair completes as the partition has to be marked active and the BCD needs to be rebuilt. You would then need to expand the partition using a third party partition manager like Partition Wizard.
As you say, depending on how much you want to do, if you have the key for Windows 7 and the install disk, you may want to simpley reinstall Windows 7. If this is an OEM computer then you would need to use the Restore disks in order to bypass activation. If you used a regular retail install disk with the OEM key you obtained using a keyfinder then you would need to do a phone activation after install or use this utility to save your activation files from your current install.