I found that 7.78GB (as reported in Finder Get Info) was the upper limit on my iMac. I wanted to absolutely maximize the amount of space on the first partition, so during installation of Panther, I went back and forth between Installer and Disk Utility, increasing the first partition size by small increments until Installer would no longer all the partition to be the target. Then I backed it down to the previous size. When you only have 8GBs and you are running Mac OS X, you need every bit you can get. I mention this in case you need to redo the installation at some point.
Although the common advice these days is that you do not need to defrag with Mac OS X, in the case of the small first partition, it is still a useful and needed utility. I use Tech Tool Pro 4, and do the optimize routine about once every six months. Note: Micromat just release version 4.5.1 and, unfortunately, it requires Mac OS X 10.4 or later. Fortunately, version 4.1.2 is very good and it supports Mac OS 10.3 or later.
So your problem may be severe disk fragmentation. It may also be a disk directory problem. Alsoft's Disk Warrior is the "utility of choice" for fixing and optimizing the disk directory, but Tech Tool can also to that type of repair and maintenance. I had a recent problem where Disk Warrior could not repair but Tech Tool did (at least well enough to save the data and reformat). [Apple's Disk Utility can repair basic disk directory problems; have you tried booting from a CD and running Disk Utility?]
I believe one thing that causes fragmentation is the swap file under Mac OS X. It is part of the Unix virtual memory scheme and it uses free space on the boot volume by default. With a huge boot volume, this is not a problem, but I think it becomes an issue when the free space gets down to less than 10 GBs. Unfortunately, our whole boot partition is less than that...! I noticed that as I used my iMac, even though I had 3 GBs of free space, it would slowly get "eaten away" until I had less than half of GB left (according to a Finder window). At the same time, performance became degraded. Restarting would restore my free space and performance. The more apps I used at once, the more noticeable this issue became.
The solution is the best performance tip I found for Macs with the 8 GB "handicap." There is a way to change the location of the swap file to another volume. I wrote a post about it a few weeks ago, so please see this link if interested.
http://discussions.apple.com/thread.jspa?threadID=584979