Rootfs is limited to 256mb of memory because it's a separate chip (or whatever) that's attached to the processor if I'm not mistaken.
Every program installs a bit of itself in rootfs, some more than others, and the rest of it it installs on other parts of the device.
Now, it runs out real quick, so you have to be aware of it, a good way to keep track is to download conky and check it out once in a while.
If you run out of space, you can't install anything else.. Firmware updates require huge amounts of rootfs space (Just for installation) and updating can be extremely problematic.
To free up space in rootfs you should remove unneeded apps and try this link http://wiki.maemo.org/Free_up_rootfs_space