^^ Actually its activated by default in XP but if somehow it was disabled then you can't use this feature. And also sometimes the system files are damaged so badly that recovery can't recover your OS and that maybe case of you.
I 2nd the above explanation. This problem occurred to me too.
I had a XP SP2 CD. I used nLite to slipstream SP3 onto that XP, and tweaked around many settings to make it faster.
When I burned the modified XP, I was disappointed to see that, the option to Recover which comes before the actual setup begins was vanished. But this Recovery option was present in Win SP2!
So till today, if I want to install XP, I use the modified setup. But for recovery options I use either CD's:
1. Win XP SP2
2. Ultimate Boot (UBCD)
3. Linux Live CD.