Finally, after 3 hours at the verge of a nervous breakdown I've got this right.
For some dubious reason Win XP recognized the Lumia 520 as a camera, not a phone. It was listed in device manager under imaging devices, so I could only transfer pictures and no other file types were supported. So I plugged the phone to computer via USB cable, I went to device manager -> imaging devices -> Lumia 520, right click and Uninstall. Unplugged the phone and plugged again and Windows XP recognized the d*mn phone as RM914 - Lumia 520. Then I had acces to both phone and SD card and I could transfer any type of files.
Easy peasy - NOT!