I am going to install CentOS 5.6 by bootable dvd and I arrive at the Installation Method stage that forces me to choose one item to identify CentOS packages. My CentOS iso file exists on my hard drive and I dont know which one to choose?
If i understand you correctly, installation method depends on the source of the system you will install. In general, your choice is between local (from the CD/DVD/USB that you've inserted or from NFS share in your network) and remote (ftp, http). Just choose "DVD/CD-ROM " as method and follow the prompts. This has nothing to do with coexistence with Windows.
Stage, where you decide on coexistence is partitioning. You have to make sure to retain your current NTFS partition, so don't choose 'automatically remove all partitions on disk'. And don't remove it manually. Installer will automatically find that you have second OS in later stages and give you option to boot either CentOS or Windows from the boot manager (GRUB)
Also, take a look at the Installation Guide. It may be a great help for you.
Consider nuking your Windows partition, after archiving all of its content, and reinstalling Windows as a virtual machine. I've had fairly good experiences doing this with Windows 7 on Xen on Debian Squeeze (stable; I confess that the Win7 on Parallels on OSX is much nicer to use, but that is likely not an option given your stated hardware). I see the Xen wiki has a writeup for HowToXenWindowsOnCentOS5, for WinXP. For either, you need to do a little configuration of the Windows guest OS:
A particularly nice thing about virtualisation is that sharing filesystems becomes painless: Xen will mount your Linux filesystems as drives on your Windows guest, so that you can use the same home directory for both Linux and Windows. And you can install Windows from an ISO image file, rather than needing physical media.
If you must go the separate-boot on separate-partitions route, the process I recommend goes so:
Several of these steps might give you trouble: feel free to come back and ask for help if they do.