Solved it!
I have several email accounts configured in Mail. While Mail was eating up the memory, I've noticed the rotating circle at one of the accounts indicating Mail is doing something with it. This particular account was Google mail via IMAP. What I did to resolve problem is I deleted Google mail from my accounts and I've restarted Mail. Things turned back to normal! Then I've added GMail account again, and it is working like a charm since, Mail is using only 238Mb of memory.
Therefore, I can conclude there is a bug in Mail handling email accounts (in my case Google mail via IMAP) and it is doing something with that account that increasingly takes ridiculous amounts of memory. Removing the account in questions, restarting Mail and adding the account again has solved the problem in my case :))
Danny