If Apple service is able to fix the problem without erasing the drive, try to get them to write down an explanation of what they did so you can tell us and future readers can benefit.

OK, I will

Of course, that's your call.

I feel you came pretty close and learnt a lot in the process.
You shouldn't expect every tech to fully understand what's happening to you as the problem does not seem to occur frequently. You might want to point them to this thread or give it another swing yourself.

As you have backup, there's nothing more at stake than a little bit more of your time.

I thought I'd add to this, I suffered my second occurence of this transaction too large kernel panic.

The first time I was able to boot from the install disk and I did a OS reinstall and had to remove a file from the Trash since deleting it caused a problem.
Today I couldn't even boot from install disk. I could boot in single user mode, a web search indicated a journalling problem but in single-user mode it is not possible to run diskutil to disable journalling. Trying to mount the disk writeable caused the kernel panic. I managed to disable the journalling by
/System/Library/Filesystems/hfs.fs/hfs.util -U /

It threw some error messages but disabled journalling and I was able to boot.

Now that journalling is off I'm going to try to delete the file that caused my previous panic.

BTW - I have an Intel iMac with 500GB (ish) hard disk.

You might consider instead just making a complete backup and then erasing the disk and reinstalling OS X.

I had the same problem when trying to empty the Trash after having placed a very large file in it (over 70 Gb, due to a problem while encoding a movie).

Any attempt to access the hard drive under OS X caused a kernel panic and I couldn't manage to disable journaling while booting in single-user mode (note that I haven't tried the solution presented above by langdt, as my problem occured earlier, the following is to be considered a workaround if that solution does not solve the problem).
The only way I found to either copy data from the hard drive or to even format the hard drive (!) was to do it under Linux, with an Ubuntu LiveCD.

The procedure was the following:
1 - download and burn an Ubuntu liveCD
2 - boot from the liveCD on another mac
3 - connect the unaccessible (under OS X) hard drive (FW target mode) as well as another external hard drive to the Ubuntu Linux booted mac (the other hard drive enables you to backup data from the unaccessible one...)
4 - enable root access under Ubuntu Linux to be able to access all files on the unaccessible hard drive
a. open a Terminal window under Ubuntu to define a password for the root use: "sudo passwd root", then type in the password of your choice
b. under System/Administration/Login Window, enable admin login
c. change user: Quit, then Switch User
d. type in root as User and the password you chose in a. above
5 - Copy data you forgot or chose not to backup... (this is fine for files, I had problems with applications)
6 - Format the unaccessible hard drive
a. open a Terminal window under Ubuntu Linux
b. use the "mount" command to identify the drive to format (of course be careful, the drive, as all other drives, would be indicated in the following way: /dev/sdd3, where sdd3 is a variable; other Terminal commands may be needed to precisely identify the correct drive...)
c. use the umount command to unmount the drive: "umount /dev/sdd3"
d. format the drive with the following command "mkfs /dev/sdd3"
7 - the drive is then formated with the standard Linux format ext3
8 - turn off macs and drives and disconnect them
9 - boot the mac with the reformated drive from the OS X installation CD/DVD, then launch Disk Utility and reformat the hard drive in HFS+ format. I chose not to activate journaling, I hope you guess why...

Recovering boot disk journal panic
 

A quick addendum to the above. When the boot volume is the one that has the overflowed journal, it's possible to get a kernel panic even after a fsck, when mounting the volume read/write once more.

The trick seems to be using mount_hfs in single-user mode to turn off the journaling:
/sbin/mount_hfs -w -j -o update /dev/disk0s3 /

However, when this is done, a kernel panic happens anyway, so it looks like the command failed. It did something though.

Don't worry (much), press on. Bring the system up in single-user mode again, then do the "fsck -fp /" command; this seems to clean up the root filesystem and the subsequent mount to read/write mode works. You've got the disk back! Reboot normally.

Of course, now it's not journaled, which you can change with diskutil later on after you've copied those critical files to a backup location.

I hope this will help someone else who's encountered this problem.
-D-

Wow, this thread saved me! A MDS crash log (60GB) filled my HD. I deleted the file and emptied trash. I got a panic during the crash. I booted it in FW disk mode, and I got a panic on my machine. I removed the HD, and put it in an external enclosure. I got a panic. I was out of luck in the GUI. Single user mode gave me read only access. I removed journaling using (thanks langdt)

/System/Library/Filesystems/hfs.fs/hfs.util -U /

I rebooted, and recovered my data. Sweet! I had informed the user that the data was lost for good. I got to go back and tell her that I recovered everything. Excellent!

I have the same problem as thegooch49, but when I try the /System/Library/Filesystems/hfs.fs/hfs.util -U /
I get the following

hsf: disabling journaling for mount @ 0x3a6fd00
Failed to remove the journal //.journal (Read-only file system)
Failed to remove the journal info block //.journal_info_block (Read-only file system)
Journaling disabled on /

Does anyone have additional advise of what I can do?