Foldarn, just a little correction. iPods cannot play mp3 audio in mpeg-4 videos. They can only handle LC-AAC audio in mpeg-4 videos so you are encoding to 96kbps LC-AAC audio.
It all depends on the video bitrate and audio bitrate that you pick, the video bitrate being a much bigger influence. The resolution doesn't really matter as a 320X240 768kbps video will take up the exact same amount of space as a 768kbps 640X480 video.
If you are looking for good quality videos for strict iPod playback, then you can encode to the 320X240 resolution using the mpeg-4 AVC (h.264) video format at a video bitrate of 768kbps and a audio bitrate of 128kbps. A 3 minute video will take up about 16MB using those settings. If you are looking for good quality videos for iPod playback, computer playback, and TV playback (ie you hook the iPod up to the TV) then I suggest you encode at 640X480 using a video bitrate of 1.5Mbps (1500kbps) and a audio bitrate of 128kbps. A 3 minute video will take up about 39MB using those settings.
So it all depends on the settings. A 2 hour movie can take up 640MB when encoded at 768kbps or 1.5GB if it is encoded at 1.5Mbps. Either video bitrate will look the same on the iPod's screen, you just need to use the larger video bitrate if you want to hook your iPod up to your TV. You could also compromise and use a video bitrate of 1Mbps (1000kbps) which would produce a 2 hour video size of around 1GB.
It is all up to your eyes and where you want to play these movies.