Is that a good approach?
Honestly, it seems like a waste. An Xserve is pretty sweet piece of kit. To me it would be shame to run Linux on it. If that's all you have available to you, though... But, then, this is subjective. (See below.)
Is Mac OS X lightweight?
Not constructive / no we won't help you with capacity planning. This site is not intended for broad or open discussions. Things that are subjective. It's to serve a purpose for Q&A of which there are definable answers. Also, we won't plan your infrastructure for you.
Could I install Linux on it?
Yes. I have a colleague that migrated his Xserve/OS X environment to Linux to get the enterprise level functionality he needed from a modern OS. With recent OS X Server software updates, features he requires has been eliminated. He turned to Linux as a replacement.
Only you can define lightweight and only you can set your resource requirements. It depends on how many VMs, what their load is like, and the resources available to the physical host. As this stands, it's either Not constructive or capacity planning related. I have 2-3 VMs on a Mac Mini under OS X. Surely an Xserve can do the same. That said, maybe your VMs have much higher resource requirements.