I don't know of any limit for the overall size of the epub, and the epub spec itself does not impose any file-size limits.
But I do that that ADE based ereaders limit the individual files to 300k (at least the older ones like the Sony's did - don't know if this has changed yet).
So if that epub is one 900+ KB xhtml file, then yes, older ereaders will not be able to open it.
IMHO, it's much better to break out each chapter as individual files, or, if you have small chapters in larger sections, then make each section an individual file.
I don't know of any negative impact from have lots of small files. I'm sure someone here has different ideas though!
Troy