Current configuration:

Motherboard: Asus P5K Premium
Memory: 4x1GB DDR2 1066 Corsair memory.
Graphics card: Asus EN8500GT Silent Magic 512MB

OS: Windows XP Professional 32-bit

XP shows that 3071MB is available. Originally, I had expected around 3.3GB, but with 512MB on the graphics card, I guess the lower value of 3071MB is right.

I want to add another (cheap as possible PCIe) graphics card, which is going to be used for driving an additional 1280x1024 DVI and a 1024x768 analog monitor.

Question: Is the amount of memory taken away from my physical address space directly proportional to the memory on the additional graphics card, i.e. will I lose an additional 256MB if I choose a 512MB card instead of a 256MB one?

(I know that for my use, I could just grab the 256MB one, but the difference in price between the 256MB and the 512MB cards is less than $10.)

Unless I'm mistaken,I dont think it works that way.
Applications take up the memory not the graphic card.You're saying that a 8800gtx will take 768 mem.from the physical ram....um I dont think so.

Yes, but only if youre using it. Most apps dont require that much memory, and at 3 gigs youre fine. As for going 512, do it, as most games can always use the extra ram, the only time you wouldnt want more ram is on a lower card, or 1Gig, but even that can be disputed on the highest end cards

The relationship is there but it isn't exactly linear as other factors come into play. You will see your total memory go down some, but not the full 512, and your available memory is likely not to change much.

1. I frequently hover around the 1.5GB mark and occasionally bump my head on the 2GB limit on my old system when I am running Visual Studio, Photoshop, and a few other applications at the same time. If, in addition to those, I want to run a 1GB virtual machine, the 3GB limit becomes a limiting factor and the difference between 256MB and 512MB (i.e. 2.75GB and 2.5GB) is not entirely insignificant.

2. As I mentioned, the card will be used to drive two additional monitors, implying that the 8500GT is free to do the heavy work. Gaming performance is unimportant. The only situation where I might want some performance from the card is when playing back HD video. My old 7600GS card struggles doing that. I do not know if it is because of the 256MB on it, that it is running two monitors, or - more likely - the cpu is the bottleneck.

The graphics card (and other devices) take up address space, if not actual memory, from 32-bit Windows, which then cannot be utilized by applications.

(I do not recall mentioning anything about 8800gts or 768MB).