1/ No. Your BIOS will probably not recognise SATA as a boot option.
2/ Doubtful, but you could go in to it and see what your options are for booting. If it list SCSI or SATA it may be possible but I wouldn't count on it.
3/ No. You can mix them, you just need a PATA drive to boot from. The SATA drive would have to be used as additional storage via a PCI card.
Your best option IMHO would be leave the 120GB drive as it is (C: drive with OS) and add another 500GB PATA as a slave, removing the old 40GB WD one.