I'm running Xterm in a Linux VMware Virtual Machine. I can copy out of it but I can't figure out how to paste into it. On a desktop computer, the middle mouse button or shift + insert does the trick. How about on a MacBook Air?
If you're using an external mouse, clicking both buttons (if it's a two button mouse) should do it.
I'm not aware of a way to do it with the trackpad only unless you use a third party tool like KeyRemap4Macbook which will let you bind, eg, ⌥ + left click to a middle click. I've just tested exactly that combination and it works fine for pasting into an X11.app Xterm so should work fine with your VM.
Most terminals on Linux allow you to paste with Control+Shift+V.
(The shift is to make this match Control+Shift+C for Copy, because you can't use Control+C in a terminal because that's already mapped to kill the running process [^C].)