1) Version 1 had a 4 GB max. When you hit that limit, no new index entries will be made. This size is not adjustable.
2) Version 2 issues
a) On my 40 GB drive, the Google Desktop index is already taking up 7 GB.
b) there is no way to limit the index size
c) there is no way to analyze what is taking up "most" of the space - is it Emails? is it Web history?