Windows XP uses Automatic Private IP Addressing (APIPA) to automate Internet Protocol (IP) configuration of network connections.
By default, the computer first tries to contact a DHCP server on the network and dynamically obtain configuration for each installed network connection. If a DHCP server is not reached after approximately 60 seconds or leased configuration fails, the computer uses the setting on the Alternate Configuration tab to determine whether to use APIPA for automatic TCP/IP configuration or to configure TCP/IP with the alternate configuration. When APIPA is used, Windows XP uses an address in the APIPA IP address range (169.254.0.1 through 169.254.255.254) and the subnet mask is set to 255.255.0.0.
Automatic Private IP Addressing APIPA is a feature of Windows-based operating systems and included in Windows 98, ME, 2000, and XP. See Automatic Private IP Addressing - a Whatis.com definition for further defails.
The range of IP addresses (from 169.254.0.1 through 169.254.255.254) used for APIPA is reserved by the Internet Assigned Numbers Authority (IANA). Any IP addresses within this range are not used on the Internet.