A swap file is used for virtual memory. When you need more memory than you physically have, Windows moves memory bits not currently in use onto the hard drive that you specify (or your Windows drive, if you didn't) to make room in physical memory. For this to work smoothly, you need about twice the swap space of your physical memory, and it should be as unfragmented as possible. If you let Windows manage your swap and you overload your HD, you're bound to run into trouble, because

1. By default Windows is constantly growing and shrinking your swap, letting you give it less and less room and
2. If your HD is fragmented and the swap grows into the fragments, it takes longer for Windows to work its magic

So, for best performance, defragment your HD, then go into the virtual memory settings, and set both the minimum and maximum swap size at 2 times or 2.5 times your physical memory. After doing this, you can fill and fragment your HD all you like without fear of losing system performance because the swap space will be constantly reserved in unfragmented disk space.