GNOME 2.14 has this feature already, it's in the Desktop menu.
KDE 3.5 has a feature to start another X session (though not in a window) as well, choose Start New Session under Switch User in the K menu.
OK. Make sure you have the xnest package installed before you start,
Create a script called 'start-new-session' or whatever you want to call it. Open it with an editor and put in:
Xnest :1 & DISPLAY=:1 startkde (NOTE: swap startkde for whatever DE you want)
Run chmod 755 on it. Run the script.
Limitations: you can only run one of these sessions at a time because it always uses display 1. If anyone has a patch for this please tell me. Also I have had some trouble getting it to work using su or sudo.