<p>I would like to embed a light weight web server in a Windows application developed in .NET. The web server has to support PHP.</p>

<p>I have looked at Cassini, but it seems it is ASP.NET only.</p>

The .net class HttpListener exposes the underlying http.sys upon which IIS is built.  All machines since Windows XP2 have http.sys installed by default.
Here are some links to get you started.
XML-RPC SERVER USING HTTPLISTENER
HttpListener For Dummies
As for the PHP support, I don't know how you would enable this, but there is no technical reason you couldn't build it in.