You really need to replace that small hard drive with a larger one. OS X requires quite a bit of disk space (not only for the installation, but for swap space as the hard drive is used as RAM), and you're cutting it really, really close. Soon you'll have lots of problems.
With only 2+GB used in the installation, I'd say there's very little you can drop to gain more disk space. Ultimately, it won't do you much good.
I suggest a new, larger hard drive and maxing out the RAM in your iBook. This will elongate it's lifespan and make your OS X experience much more comfortable.