Is there any limit on the physical memory size (file system) one can utilize in a iPhone application. My concern is what if someone keeps on writing some data files in the Documents folders and do not purge it. And the data can be of any size.
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The only hard storage limit is that of the total available space on the iOS device.
The scenario you have described is likely reality… there is a feature in the upcoming version of iOS that will assist in managing this issue, but it’s still under NDA so cannot be discussed here. (yet)
EDIT: And in iOS 5, on your device you can now go to Settings -> Usage to get a list of all installed apps on your phone/pad/pod and see how much extra space they are consuming. 🙂