A smaller HDD won't be faster than a large one. In fact, I would think the opposite as these discs are the same physical size, so data on the larger drive will be packed in a smaller space, allowing less movement to access the same amount of data. But really, there's no difference.
Drive performance does slow down as the drive fills up as it begins to access data that is on the outside rings of the disc which requires more movement than the inside of the disc to access the same amount of data. But this effect is not detrimental, the real slow down would be the lack of space for windows virtual memory. As drives fill up, windows causes a lot of movement to find those fewer and fewer free spots on the discs to place virtual memory, so everything else in windows takes longer as a result.
RAID 0 (striping) is the fastest setup you can use. Basically two drives sharing the workload to provide maximum performance. read more about raid arrays here:
http://en.wikipedia.org/wiki/Redundant_array_of_independent_disks
There are three HDD specifications that you should be checking to find the fastest drive for your money, RPMs, interface, and cache size.
RPMs is simply how many times the HDD can spin in a minute. Faster is better because it allows the HDD to access and send data faster. 5200 is outdated and slow. 7200 is the mainstream standard today and is decent. 10000 (WD Raptor) is the fastest available for a non SCSI, but much more expensive than 7200. SCSI can also go up to 15000, but again its expensive.
Interface is how the HDD connects to the motherboard. IDE(ATA or UDMA 66/100/133) is the slowest because it provides the least bandwidth. If you get an IDE drive, make sure it's the 133 version, you don't need to go any lower than that. SATA I (SATA 150, 1.5GB/s) or SATA II (SATA 3.0GB/s) are the mainstream interfaces today and provide significantly more bandwidth that the old IDE interface. SATA II provides double the bandwidth of SATA I. However, you really won't gain a performance boost between SATA I and SATA II because there isn't a HDD out there that can send enough data to use up 1.5GB/s.
For cache size, you want 8 or 16MB cache. Not much difference between the two in terms of performance.
I have two RAID 0 setups. One with two 36GB 10000 RPM SATA Raptors and one with two 160GB 7200 RPM IDE drives. The raptor setup is easily twice as fast as my IDE setup. I noticed those most easily in HL2 load times. While the load time on the raptors is annoying(i really hate loading screens), it's fairly short. On the IDEs, I could take a nice vacation to the Bahamas. Well, I haven't timed them, but like I said, the raptors are easily twice as fast and possibly three times as fast.