This is so wrong. I thought there was something seriously wrong with my machine since I started getting those random freezes too. Overheating or a dying motherboard / power supply / video card came into mind at first... and in my case overheating seemed so unlikely. And all this time the freezes were caused by this rather covert setting of High Priority. Devs: Might want to consider putting that config file into the game installation folder, instead burying it in the Application Data of XP.
Lesson learned. If a program freezes, check its priority. Honestly, I would've defaulted the whole thing to Normal and made a separate mention in a little paragraph titled "How to increase UFO:AI performance", along with a warning that other programs might suffer if the priority is changed. But that's just me.
Not only all this, setting
set sys_priority "1" gives High Priority but
set sys_priority "0" gives Normal.
There is no option for AboveNormal, which is between those two :| (though you can change it in the TaskManager if you AltTab out of the game after starting it, which is always an annoyance)
Curiously, the freezes didn't occur from the beginning, but later in the game. And only after 15 minutes of playing a tactical mission. Although this has been a bit troubling experience, something positive did come out of this. It made me look inside my PC case and noticed one of the case fans wasn't operating. Apparently forgot to replug it a month back while installing new hardware.
Also, if any of you get a freeze during a mission, don't hit the reset button on your PC case immediately. The freeze might pass or let go for a moment after a minute or two (move your mouse cursor around every 10 seconds or so to check). I witnessed this several times. That's your chance to exit the game.
EDIT: Looks like the culprit was my mouse after all. Switched mouse and got no more 1-2 second pauses (in High they were untolerable, in Normal manageable). However, running the game in High process priority wasn't still a good idea. Background processes still suffered.