I was facing the same question when it came time to load up my iPod. At the time I had a library of 192kbps MP3s which I allowed iTunes to convert to 128kbps AAC for the iPod which I have since converted completely to 128kbps AAC. When you select this option, it does indeed keep the original files and the converted ones go onto the iPod. If you're using MP3s (unless they're VBR or higher bit rates) you really won't notice much difference between the original and converted AAC file since AAC's superior to MP3 in many ways. For example, a 128 AAC file is comparable to a 160 to 192kbps MP3. If your case the 160 to 192kbps MP3s, you shouldn't notice much of a difference if at all. However, you *might* with higher quality ones. The point of that option in iTunes, as you probably already know, is to help fit as much music as possible on the iPod and it actually works great.
As for making the iPod slow, no, it shouldn't. Though, hard drive-based iPods can lag a bit but that's to be expected.
Of course, I always recommend going lossless whenever possible. Since iTunes doesn't (currently) support FLAC, Apple Lossless easily suffices... unfortunately for an iPod this is currently not a viable option due to hard drive/flash memory space available on current iPods. I'd need over 20 160GB iPods to hold my lossless collection!
I have two main libraries, one consisting of my "main" massive music library in 128kbps AAC for the iPod and general listening and a second growing library of albums in Apple Lossless which in the future will become the main library.
Ahhh, can't wait for the 3TB iPods to come out, someday...