This BIOS feature does two things. It selects the size of the AGP aperture and it determines the size of the GART (Graphics Address Relocation Table).
The aperture is a portion of the PCI memory address range that is dedicated for use as AGP memory address space while the GART is a translation table that translates AGP memory addresses into actual memory addresses which are often fragmented. The GART allows the graphics card to see the memory region available to it as a contiguous piece of memory range.
Host cycles that hit the aperture range are forwarded to the AGP bus without need for translation. The aperture size also determines the maximum amount of system memory that can be allocated to the AGP graphics card for texture storage.
Please note that the AGP aperture is merely address space, not actual physical memory in use. Although it is very common to hear people recommending that the AGP aperture size should be half the size of system memory, that is wrong!
The requirement for AGP memory space shrinks as the graphics card's local memory increases in size. This is because the graphics card will have more local memory to dedicate to texture storage. So, if you upgrade to a graphics card with more memory, you shouldn't be "deceived" into thinking that you will need even more AGP memory! On the contrary, a smaller AGP memory space will be required.
It is recommended that you keep the AGP aperture around 64MB to 128MB in size, even if your graphics card has a lot of onboard memory. This allows flexibility in the event that you actually need extra memory for texture storage. It will also keep the GART (Graphics Address Relocation Table) within a reasonable size.