Object size is not what the game could lag over. it's complexity and the amount of textures + size of textures. Since what you have up there doesn't seem to have a lot of polys to it, the game should handle it just fine. FYI, the sky box is the largest mesh in the game. Try importing one of those suckers in 3DS Max. It shows that it doesn't matter how "large" the object is. Physical size means nothing in the virtual world!
If however you had the idea of trying to convert terrain to meshes...forget about it! If you convert a typical height map into a mesh (yes there is a tool that will do this!) that mesh will have so many polys to it that your game will run at like 1fps the moment the mesh comes into view.
