Can I install 32 bit driver in XP mode on my Windows 7 64-bit?

You can certainly install it in XP Mode, but since that's just Windows XP in a Virtual PC VM, it will not magically become available to Windows 7. You need a 64-bit Windows 7 driver or different equipment.

XP mode allowed me to install the 32 bit driver. I was working with DNW. I had to attach the USB manually. Answer for this question is "Yes, it works sometimes"

But USB connection with DNW on a 64 bit Windows 7 didn't work correctly. If you have come here searching for installing USB driver for DNW under Windows 7 64-bit, you are out of luck. I found a similar question here: http://www.friendlyarm.net/forum/topic/261