From gamasutra.com:
When Xbox Live Arcade originally debuted, Microsoft told game developers that their games couldn't exceed 50 MB in size. Microsoft wanted the games to be easy and quick to download, and that the games be fast, simple, pick-up-and-play experiences.

But Microsoft this week confirmed that, after numerous previous size increases, the size limit has been raised once again, now to a full 2GB, or 40 times that original size. "We are always working closely with our partners to deliver innovative and high-quality Xbox Live Arcade games to our community," a Microsoft rep said in a statement.

The confirmation follows a Tokyo Game Show report from consumer site IGN, that said the 2GB size limit is final, reportedly a technical limitation of XBLA's file structure. Larger games are downloadable on Xbox Live's Games On Demand service, where users can download full-sized retail games like Mass Effect and The Elder Scrolls IV: Oblivion.