You don't need to go for a 2 GB drive, but just get the size you think would be enough for you. If you look at the site I described earlier, you will see that some ROMS would only see 512 MB of the harddrive, so you have to take this into consideration.
If you manage to get your A500 to boot afte putting the new harddrive in it, it should only be a matter of launching the A590 setup disk and enter HDToolBox. Here you create partitions on the harddrive, and you choose which one should be bootable.