Cheap Android phone for developer

Oh, I would suggest a free one called the Emulator that comes with the Andriod SDK which you will have to become familiar with anyway if you are going to develop.

Get started here.
Android SDK | Android Developers

 

X10 should be able to run 2.3 yes. Even X8 does, I have used X8 myself and it has the typical screen size and prestanda of a 480x320 phone. If you need to try in higher resolution I'd go for HTC Desire or any other phone with a screen size over 4 inch.

 

Emulator is a big help but for certain stuff like camera or video you still need a real device to test. On top of that I notice for some UI it looks fine in emulator but it looks a bit off on a real device. This is despite you use auto-fit layout like LinearLayout etc.

To keep story short, you need Emulator + real device to develop Android app. Emulator alone seem ok but not complete.

 

You need to look at this post. Perhaps this gentleman can help you and you can help him.
Xperia x8

 

I'd recommend trying to find a cheap (used) Nexus One (on ebay or something)

 

I've read that Sony Ericsson has a device-loan system for exactly this purpose. You should check out their developers website.

 

Either try get a used Google NexusOne on eBay or get a used Xperia X10 (the big one with 4inch display) as it can be updated to 2.3.3.

Xperia X8, X10mini and X10MiniPro cant be updated to 2.3, unless you load them with a custom ROM, on the other hand the big X10i has an official 2.3.3 update from SE.