Can I use a larger HDD than my required limit?

There may be actual hardware constraints that make any HDD over 200 GB unreadable by the machine, but more likely it is constrained by the BIOS or OS. You should contact Acer Customer Support (or go on their support forum) and see if they can answer this isue for you. Most likely your question has come up before.

Thank you I will ask them  

HDD size limitation would not be a function of Operating system as even with XP a 500 gig HDD is fine.
Only problem would be a BIOS limitation.
The only BIOS I found was V1.45, dtd 12/08/2008 and It does NOT indicate if this is an updated bios, and if so it does NOT address what changes were made.
Before Buying verify if your drive is a PATA (IDE) or a SATA HDD. Unknown - Just look at the Connector, if it takes a wide ribbion cable (40, or 80) pins then it is the IDE (PATA) version.

I'd say 50/50 chance of Bios recognizing the drive.
.. If it recognizes it, most likely you will see the full size.
.. IF it does not recognize it, it is doughtfull that you will be able to use it.

I definitely know it is a SATA. I also know that the V1.45 BIOS is an updated version but like you said it doesn't specify what the changes are.
I know in the Specification Documents from Acer it states "Up to 200Gb for storage" and that's it nothing more.
I have contacted Acer and will see what they have to say. it's no longer under warranty but like most company's they'd rather you not tamper with it and instead buy a new laptop. I won't be doing this for awhile so this is the next best option option.

Just to confirm the HDD in there now is a 80Gb 2.5" SATA 5400RPM HDD not sure of the cache size.

Can double space and increas performance with 160 Gig 7200 RPM WD drive
http://www.newegg.com/Product/Product.aspx?Item=N82E168...

Thank you for your research  
I've seen the exact item you have posted... Only problem is I don't think they post to Australia.
I've went though the check out options and I don't see any options to shipping internationally.
And most of the ones I've seen that posted to or within Australia are about $120 double the price.
This is the reason to why I want to see if I can get a 320Gb or 500Gb as it's about the same price.