128 MB seems low for a GUI environment, but I'm fairly certain it is possible with Squeeze.
Just for info, I recently did a minimal Wheezy install (no GUI) on a machine with 32 MB RAM and 2 GB disk (337 MB of 1.8 GB used for / with the remainder used as swap). It was a bit tricky (I had to enable a swap device near the start of the install) and slow, but it worked.
I reckon I could get a basic GUI running on it too.
It is very possible, with a lightweight WM, to get X up and running, any of the box WM's (fluxbox/openbox/blackbox), TWM or it's ilk will suite your needs ... I run a lightwight X server on my Firewall box to manage some GUI apps (static webpages that I need to see quickly and easily w/o waiting for a new browser tab to open and load)
--
Did you know...
If you play a Windows 2000 CD backwards, you hear satanic messages,
but what's worse is when you play it forward....
...it installs Windows 2000
-- Alfred Perlstein on chat at freebsd.org