WOW. I have the answer. For the first time, I can actually use my Electrical Engineering degree from UCD to help.
Several reasons have been mentioned already. Its cheaper for companies to get dies out of a single wafer. But the fundamental limit is about 1cm or so, because:
First, silicon wafers are about 99.9999999% pure. What that means is that there are essentially no unwanted impurities, such as specs of dust or atoms of oxygen, atoms of hyrdogen, any other impure metals. Yet, even with that amount of purity, if you imagine a wafer with billiions of atoms, many impurities will be present no matter what. And these impurities, no matter how small, can be labeled as "catasrophic defects" which will render the processor useless.
So now, for our purposes, imagine a square wafer with 3 "catastropic defects" randomly placed on the wafer. If you cut the square wafer down the middle to create two processors, then most likely, each of the two processors/wafers will not work: YIELD = 0%. Now, if cut the square in fours, then it could be only 1 out of the four processors will work: YIELD = 25%. Again, now cut it into 9 pieces. Your yield now can be 6/9, 66%. Cut it into 16 pieces, yield is now 13/16..and you get the point.
Imagine this on a larger scale. These days, the yield is something like 50 some percent, which is considered good, i think. The smaller dies you make, the more yield you get and the more money you make at a lower cost.
Someone then once did the statistics and played around w/ math, and noticed that if you build procs bigger than 1cm by 1cm, the yield that you can get will not be worth the cost to build the processors, hire the engineers, build the billion dollar manufacturing plants.
Hope this helps.