Update: This has been fixed in the January 2009 CTP of the Windows Azure Tools for Microsoft Visual Studio
Shan McArthur who’s been raising a lot of great issues and giving a lot of great feedback on the Windows Azure forum has recently blogged about an issue when using the “Publish” functionality in Visual Studio.
Hani did some research and found that in our use of types in the System.IO.Packaging namespace, there is a point in which the code switches to using IsolatedStorage (most likely based on memory consumption) and when that happens, we’re failing due to the way that the AppDomain we’re running in is setup.
In other words, it doesn’t have to do with complex references but ultimately the size of the package being created.
As indicated in Shan’s post, you can workaround the issue by using cspack from the command line.
We are actively working on the issue.