As of Android 2.2, the screen resolution for an Android device is capped at 854x480, which has pretty much become the standard resolution for recent Android handsets. However, with the current generation of the iPhone sporting the so-called "Retina display", is there any information on if and when this cap will be raised? I haven't been able to locate any definitive information on whether or not this cap is altered in Gingerbread.
Gingerbread is adding support for "extra hdpi" and "extra large screen" devices, but this primarily geared towards tablet devices than actual phones (but who is to say that won't change). More information can be found here on the updated dev guide on supporting multiple screen sizes.
There is no "cap" on the resolution. In the froyo (and gingerbread) emulator, you can enter any screen dimensions you want, and there's no real problems with apps or anything (unless they're doing something wrong.) Apps just probably don't take advantage of the extra pixels or different physical size.
I think you're confusing "not supporting large screens" with "not optimized for large screens"
Honeycomb will allegedly make big screens look and feel awesome ;)