Xen 3.x can in fact run MS Windows operating systems as long as the underlying hardware support virtualization extensions (Intel-VT or AMD-V).

Most Linux domU under Xen are run as Para-Virtualized Machines (or PVMs). PVMs use modifed kernels in the domU that replace all ring 0 calls (aka hardware level) with Xen Hypervisor calls (the kernel actually running on the bare metal). This is why the kernel you run under Xen is either a custom kernel (such as the ones used by Linode) or a kernel rolled by a distro that has Xen support compiled in. For instance in CentOS you would need to install and run the kernel-xen package in PVM as opposed to the standard kernel package.

MS Windows on the other hand does not have a custom kernel that understands how to make hypervisor calls instead of ring 0 calls. In order to run MS Windows under Xen you have to create a Hardware-Virtualized Machine (or HVM). An HVM is a fully emulated physical machine. MS Windows can then make ring 0 calls to the emulated physical machine as opposed directly to the bare metal or Xen Hypervisor.

The problem (beyond the potential licensing issues already mentioned) is that HVMs are not as efficient as PVMs. Since an HVM is a fully virtualized physical system the Xen Hypervisor has to do extra work for an HVM emulating all the hardware (think emulating clock ticks of a virtual cpu). As a result you can run less HVMs of the per system as compared to PMVs of the same size.

Additionally modern MS Windows based operating systems are much less tolerant of running on under-powered systems. While I have no insight into Linode's actual sales numbers I suspect the Linode 360 or Linode 540 plans are probably the most popular. When was the last time you saw a MS Windows based operating system perform well with 360MB-540MB of memory? Windows 2008 lists 512MB as the bare minimum, though it is stated that this is for basic tasks only, and recommends 2GB. Additionally Windows 2008 requires a minimum of 10GB of hard disk space and recommends 40GB. As such you would probably need a minimum of a Linode1080 to see acceptable performance from Windows 2008.

Assuming you wanted to meet the recommended specs you are looking at something between a Linode 1080 and Linode 2880 which puts you easily in the the $100+ per month ($1200+ per year) range as opposed to $30 a month ($306 a year) for a perfectly capable Linode 540 running Linux. You can easily purchase a system that meets the recommend Windows 2008 reqfor less than $1200 (the cheapest system listed on Dell's website is $279 list price and it meets these requirement). As such it simply isn't cost effective to run Windows on a hosted Xen platform in my opinion (regardless of which VPS provider you go with).

Don't get me wrong Windows runs well under Xen (if not quite as cleanly or as smoothly as under MS's virtualization solution or VMWare's ESX platform) and my company is starting a project to migrate a large portion of our MS platform to Xen (the Linux platform migration is already well underway).

Xen is a very powerful and capable virtulization platform with a very attractive pricing model (free to cheap) compared to some of the other big names in the virtualization field that is only getting better. With a few more years of polish by the OSS communities and companies such as Citrix I think it will even be a very aggressive competitor to VMWare's ESX platform (in many ways it already is).