Hmmm... this does seem a little odd. How much RAM does the machine have anyway? I'm a bit suspect that your "main" MT is still showing over 300mb of memory when you've set the limit at 128mb. When I first started playing with Xen I had a number of very similar issues - ie: VM fails to start, but log shows nothing helpful. The fix for me was to set the memory limit for main so that there's enough free memory to allocate to my Xen VM - but you've done that anyway.
I know this sounds a bit odd, but try setting the memory-for-main to another value, then back to 128mb and then reboot. I've had a couple of bizzar instances now where a setting hasn't taken effect, and then if I remove and re-apply the same config, it magically works!
FWIW, here's my config incase it helps. I personally can't see anything majorly different that is causing yours to fail - maybe the console port? Anyway, my MT PC has 512mb RAM total, my 1 VM has 256mb allocated, two virtual HDD images, and is based on the centos image from the MT Wiki pages.
[admin@HostServer1] > /xen pr d
Flags: X - disabled, C - configuration-changed
0 name="Server" disk-images=hda:centos30gb-server.img,hdb:support-files.img
kernel-cmdline="" cpu-count=1 memory=256MiB weight=256
console-telnet-port=64000 host-shutdown-action=shutdown state=running
[admin@HostServer1] > /xen exp
# may/23/2009 18:40:49 by RouterOS 3.22
# software id =
add comment="" console-telnet-port=64000 cpu-count=1 disabled=no disk-images=\
shutdown initrd=centos.initrd.rgz kernel=vmlinuz-2.6.18-53.el5xen \
kernel-cmdline="" memory=256MiB name=Server weight=256
add comment="" disabled=no dynamic-mac-address=02:CA:09:2E:40:92 \
static-interface=vif1 type=static virtual-machine=Server vm-mac-address=\
[admin@HostServer1] > /system resource pr