I am also having the same problem installing a template that's 2.48 mb. --I get an error message saying "There was an error uploading this file to the server." so I am assuming it's the file size. Under "warnings" it tells me "The maximum file size for uploads is set to less than 2MB which may impact on uploading large extensions."
When I went to my host, they told me their default upload file size limit is 8mb, and walked me through uploading my template in their back end. It uploaded fine and unzipped fine. Yet it still does not show in my Joomla back end.
How can I increase the limit? and, if relevant, how do I set the php temporary directory? Is it possible that if I set the php temporary directory, I can upload larger files (in this case the template) to it and install it from there?
Unzip your Template (or Extension) files to "tmp" directory (in Joomla! root directory), then go to "Extension Manager: Install" and install it using "Install from Directory" method (Just click the Install button)