The backup program that comes as part of Windows 7 includes a "System Image Backup" option via a link in the upper-left corner of its main window. You'd typically make a system backup to an external hard drive.
If your OS disk dies, then there's no way to boot your system in order to restore the backup. To deal with this, the Windows 7 backup program also lets you create a "recovery DVD" - you'd burn one of these when you make your first backup so that if your OS disk dies then you can boot from the DVD and use it to restore your OS from the external drive holding the backup to the replacement drive.
In terms of the size that you need - I'd start with around 60-80GB. If you use a lot of games or other programs (or if they're very large), then add to that as necessary. You should be able to check the game's packaging or the web site you got it from to see how much space it takes.