I think it controls how far away things are drawn. If you reduce it it should increase performance but distant objects such as a skyscraper for instance may not appear until you get closer to them. However when I tried to adjust it in the GTA3 it made no difference at all.
GTA 3 has a 30 FPS limiter enabled, you computer should easly be able to run full draw distance and not have any slowdown at all.
What do you mean by slow images, do you mean low FPS? That is strange my computer is XP 2000 512MB PC133 and full draw distance on my computer when I had a Geforce 4 TI 4200 was fine. I always run with the frame limiter ON on GTA 3 VC, the game is playable at a static 30 FPS. You could download Fraps and test to see what FPS you are getting in the game.
i tell you what ill do ill get a screeny to show you. [edit] FTP wont work so ill have to upload later [/edit]