Yes, images can be bigger than the screen. The only limitation I am aware of is available heap memory. An image takes (2 * [number of pixels] + [some overhead for the header(probably constant)]) bytes when loaded. As long as there is enough (unfragmented) memory available you shouldn't have any problems.
Notice the "unfragmented" comment in my last post. Nokia garbage collector in Series 40 are non-compacting. This means that if you are creating and destroying objects, specially big objects like images, you're memory is going to get fragmented pretty quickly. Then, even if you have enough memory to load an image, the memory isn't in a contiguous block so you get an out of memory error. So the first rule is to load all your big images in the beginning and keep them in memory to prevent the fragmentation.
To monitor the memory usage of you app you can use the Runtime.freeMemory() and Runtime.totalMemory() functions. Don't trust totalMemory() on Series 60, though, because these phones have a dynamic heap so the value for totalMemory() can increase in time. On Series 40 phones you have a little over 200KB. Try to keep memory usage below 200KB and you should be fine (except for the aforementioned fragmentation issue).