The rear sway bar has had several documented issues. Some are related to off road use, and some are instances where the Xterra owner has said they never used the vehicle for "off roading".
It limits your wheel travel (aka - flex).
It might not be an issue with the shocks you have - but Bilstein recommends that you remove it if you are installing the 4600 series or HD shocks. Apparently there are clearance issues with the sway bar when those shocks are used.
It has broken or become disconnected. There have been cases where this has caused an accident.
While your getting adventurous and getting into doing things to your Xterra...
If you were so inclined - 4X4parts.com sells extended length shackles for the rear springs. They're beefy and add about 1.5"-2" of lift - and not much money. If you then (evenly and with the front wheels off the ground) crank up your torsion bar adjusters - you can get about the same amount of lift in the front. This is what is known in the Xterra forum world as a "PML" - Poor Man's Lift
I just checked - lift shackles are $64.95...
I would say your shocks would be fine for this, but someone may disagree.
So for a little time, and about $70, you could have a lifted Xterra to go along with your bigger tires!
Just spray the adjustment nuts & bolts on your torsion bar adjusters once a day or so for at least a few days. It wouldn't hurt to spray your stock shackles while you were at it.
I have been working a lot of hours, but if you think you need help, or you don't feel comfortable doing it - work is starting to slow down a bit for me. We could schedule a day and I will give you a hand