If there is a limit to image size I'm not sure what it is - I was able to run a script against my library and I see artwork from as small as 104x104 pixels up to 1905x1876 pixels (which makes me think that I should be looking for higher resolution images in some cases, and much lower in others!). AFAIK all render correctly in iTunes and on a range of iDevices.
The "standard" (at least as far as iTunes Store and Amazon mp3 purchases is concerned) seems to be 600x600, though I suspect that may be more that's needed in almost all cases (especially since iTunes 11 dropped the cover flow view and the ability to resize artwork in albums view, both of which would benefit from higher resolution). When I can't get artwork automatically from the Store and either scan images or retrieve them from elsewhere on the 'net, I tend to resize to 300x300 which seems to work fine on screen and on my iPods.
If you're not seeing some artwork images I suspect it has more to do with format rather than resolution - it may be worth experimenting with a couple of examples that don't display correctly on your iPod, replacing the existing artwork in iTunes with a JPEG file, resolution in the range 300x300 - 600x600, and see if the issue is fixed on the iPod after re-syncing.