Normally, the limit is from your video card. My card only goes up to 2048 on a side. I could get a sky of 2048x2048 (or 12288x2048 given the 6x1 wide method), but this isn't recommended. 512 for each of 6 sides (3072x512) is decent. You could go with 1024 on each side (6144x1024), but this means using 18 MB in video memory just to store this (versus just 4.5 MB with the 512 size). 512 is a good size to use.
As for the outside area, I suggest using models for the scenery. With keeping the models from 2000 to 5000 polygons (according to my benchmarking experiment), you'll be able to have the greatest detail (for shape) and have the fastest frame rate. For basic scenery, always add an action with "my.dynamic = off" in it to speed up the rendering for that model by 25% (since it seems to always be on by default). MDL terrains allow for much more flexibility in shape and can be just as fast as HMP terrains (sometimes even faster, depending on how you design it (and when a cut-out is needed, that's where the rendering speed really improves), but they take considerably longer to make. Also, model-only levels take but one second to build, regardless of what settings you have.