Canon rebel xt or nikon d40?

Which do you prefer or think is better?

There both good cameras. My photography class teacher explained to me that they both do the same but Canon basically keeps their whole functions and menus so simple so its easy to understand it when NIKON has more to it that makes it difficult to understand for someone who is barely starting.
As to Canon you get more quality for the same price as a NIKON. So it all depends on you

If you are looking at particular cameras, the condition it's in could be more important than how the model scored in reviews. Both were good in their day, and they are still pretty good. If you start spending money adding flash and more lenses, then you have an interest in continuing with Canon or Nikon. Both make pretty good stuff. I think Nikon is the winner for some, but Canon for others.
Both these oldies lacked dust reduction, and their kit lenses lacked image stabilization. The Nikon 18-55mm non-VR was reputed to be a little sharper than the Canon 18-55mm non-IS. The XT has a little more resolution. The D40 had a lighter anti-alias filter which gave it a little better sharpness, but increased susceptibility to moire artifact. The D40 is a slightly newer old model.
Here are reviews:
http://www.dpreview.com/...oneos350d/
http://www.dpreview.com/.../nikond40/
http://www.dcresource.com/reviews/canon/digital_rebel_xt-review/index.shtml
http://www.dcresource.com/reviews/nikon/d40-review/
http://www.cameralabs.com/reviews/Canon350D/
http://www.cameralabs.com/reviews/NikonD40/

These two cameras are very similar in their functionality. The Rebel will have easier menus, but the D40 lets you change the menu system (i don't know if the rebels does as well, i have a nikon) to only have what you want on it. Overall I'd say this choice depends on how they feel in your hand. Some people prefer the fit of a Nikon on their hand, others a Canon. Can't really go wrong they're both great cameras.

As far as continuous mode and flash you can't do this with the D40. You need to get a dedicated flash until if you want this done. I rarely use this feature on my flash unit. But if it is something you think you may need, then get the Canon. And it has nothing to do with the sensor. The ability to capture in low light has something to with ISO sensitivity and your lens opening and shutter speed.