I'm not quite sure how you do it on a partitioned disk but unless you have any reason for keeping it I would get rid of every last bit of OS9. On my G3 there are 3 hard drives, one used to have os9 on it but a couple of folders dragged to the trash turned it into a purely storage disc for pictures and music.
There is physical space in a G3 for 3 hard drives (actually one space may be for a CD burner but I'm not into that.
Your 160 MB Memory is not enough. I have 320 and I think that is not really not enough either. I'm on 400mhz so your speed is great as LOTR said.
The other big problem you have is your free space. You should be able to store files like pictures and video and music on the OS9 portion of your drive, but operate them with OSX Don't start trying to use Classic. It is a total waste of time!
HOWEVER 3GB is not enough space. If you use limewire you will fill that amount of space quicker than you might think! plus which. Limewire is a hungry beast and unless you operate it with a good 1 1/2 GB Free space ... (I think that's what LOTR referred to as virtual memory), after several hours the old mac will be stretched to the limit and will crash.
So your one question about using the OS9 portion of the disc, is yes I'm sure you can use it, and if you delete OS9 and it's applications you will have more space again.
The resulting disc will then be fine as a "Start up disc" which will hold OSX and your applications. Obtain a second hard drive 20- 40 GB or more. however much you have you will fill it!.....and put in the same amount of memory again.
But I advise befreinding a local Mac Geek to do the job or check you are doing it right
One more thing, is that it is possible that the latest Limewire will still not opperate in OSX 10.2 If this is the case there is a cure, but you need to get the computer sorted first. I hope this helps. Keep in touch.