Hello,
Welcome to the GE Commnuity!
I don't believe that there is a defined maximum size but, clearly, there comes a point where things start not to work very well. As you suspect, this is probably more to do with your machine. My SNCF collection is about 700k when compressed to KMZ; it's just about OK on a 900MHz machine but is unusable on a 600MHz machine (that's a very unscientific test of course).
Quote:
Is there a way to make kml/kmz files smaller?
Yes, remove some of the data from it!
Unfortunately, that's what KMZ is designed to do. Yes, it's probably possible to get a marginally smaller file with a different compression algorithm but it wouldn't work with GE and probably wouldn't help you GE still needs to process all of those objects - whichever way the data is presented.

Cheers,
Simon.