As NiLuJe says, covers are shown full size (600x800). On the Kindle 2, the in-line maximum MOBI/AZW image size is 520 by 622. On the Kindle 3 this may be a bit larger. Note that the Kindle automatically rescales images and so one option is to do nothing with the images within the ebook.
For conversion from ePub and LIT, I suggest using Calibre with Kindle 2 as the MOBI output target option. I guess there may eventually be a Kindle 3 option, but I would expect the K2 target to be good enough. One thing that Calibre will do is convert ePub SVG to MOBI images, and this is where the K2 target comes in (it sets the image size). Calibre will also shrink large images to the allowed image size.
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