I have chronicled the issue that I have been having where the Android Market was consuming an alarming amount, 24 MB and growing, of storage on my G1 phone. The issue is particularly bad because there is no direct way for you to clear that storage.
I learned that Android is supposed to automatically clear the storage when a “low storage” notification appears. I also learned of a possible way to force the Market storage to clear, which is to turn off the G1 when the “low storage” notification appears and then start it back on. Unfortunately, the first time I tried this, it did not fix the problem.
Yesterday I saw another “low storage” notification, but this time I decided to not do something for a while and after a period of time when the notification would not go away I turned off the G1. This time after the G1 booted up I checked the storage and found I had 34 MB available! I then checked the application manager, sorted the apps by size, and did not find Market at the top of the list. In fact, it was near the bottom with only 68 KB of storage.
So it does appear that Android will indeed automatically clear Market storage, but it may be stubborn and not clear that storage for much longer than you would like. Users should have the ability to clear the Market storage from the app manager, just like you do with the Browser cache. I hope that the Android update just released fixes this bug, in fact I am anxious to see whether Google has given proper attention to bug fixing along with adding features.
Notes From The Cave 