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Severe system lag spike when running minecraft server with greater than 1 user

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http://serverfault.com – I am trying to figure out what the problem could be with my game server. Currently it only run a minecraft server but may run more later. The problem I am experencing is severe system lag spikes when there is more than 1 user connected to the at once. The lag spike do not just affect the minecraft instance they affect the WHOLE system, SSH becomes unresponsive and one time the machine went completely offline and I had to drop in with the management console to regain control. The Specs! Virtual Machine running on VMware vSphere 5.1 1 vCPU with 2 Cores Allocated 4GB of vRAM (out of 16GB avai (HowTos)