Would it be quicker to make wordpress theme direct on FTP? Because client want to see the progress and if I will work on local XAMPP then it would not be possible to update any changes quickly.
How to setup theme development environment with any free and lightweight IDE for windows XP?
You have a lot of choises:
A plugin for your IDE to automatically upload your saved files to FTP.
Open your local server to the world using something like no-ip and few router configurations.
The least AND the worse, edit your files via FTP as you said using some FTP Client that allows it like Smart FTP (paid) or FileZilla (free).
All options should work... But for gods sake, don't upload to production server! Always keep an development server to test the things before uploading do production machine. This is safer to you and you client, trust me.
A great free (and heavy) IDE for Windows, MAC and UNIX is the Eclipse.
A lightweight and free IDE for Windows is Notepad++.
Sounds like you're not considering the benefits of using Revision Control. if you're not using it, change your workflow so you can. It will make your development much more secure. Working with a local copy of code will make using revision control an easier goal.
On windows, mercurial is probably a good bet, or its simple wrapping program, tortoisehg.
You want to be able to make changes fast and not have to worry about whether you can roll them back. to me that says "use a locally running development copy, use source control, and take the short time to upload a finished point in time to the server."
Fast development, a secure change history, and never having to wonder whether your code is backed up: local development, with source control.
You can save urself lot of trouble by installing a plugin called theme test drive.
Basically, only the people logged in as admins can see the new on-going theme as it is being developped. Visitors will have their regular view You can edit the theme directly then on the live website for your manager to see ( this is an alternative solution to solve ur problem)
synchronizing theme files via FTP should not be a problem since each file is only a couple of KB. so if ur editing locally, u can re-upload when ur admin wants to see