This is a pretty good guide to all the issues...
http://www.computerhope.com/issues/ch000474.htmHopefully you are using an 80 wire IDE cable, in which case...
Did you actually
jumper the old 160GB slave as master
connect it to the end connector on the ribbon cable
jumper the new 320 as master
connect it to the middle connector?
Is the ribbon cable the right way around? (blue connector plugged into motherboard
Personally I would make the 320GB drive the master and put the OS on it and use the old 120 GB as a data store/backup drive, because the newer drive is likely to have better performance and has less hours running time under its belt so hopefully would have longer to go before it fails. In fact that is exactly what I did about 2 months ago.