Well, even if XP only uses 160 MB ram on average, that IS an average and the margin between 256 MB and 160 MB is only 96 MB. Why give more than half of that ram to WinUAE if it can't make any productive use of it anyway?
Sune's other suggestions make sense to me in addition to the ones already suggested. And by all means it is important to make sure you have the latest drivers for your sound card, as that probably has been the root cause of more sound problems than any other single problem.
Sune's comment about making sure that you're not running other applications at the same time, especially any that would try to play sounds amused me. If it turns out that you're trying to play MP3's in the background using WinAmp at the same time you're playing around with WinUAE, the rest of us who have replied to this thread might just have to hunt you down and kill you.