Hi. I don't have a loot bag or anything but I would like some info on it. UESP has this:
A loot bag will appear in a cell when too many items are dropped on the ground in order to prevent the game from crashing due to the number of item slots being exhausted. They always appear in the dead center of a cell and anything dropped in that cell thereafter will appear in the bag.

But that's it. I'd expect there to be a whole page for it.

I remember having some info before, though it might have been for Morrowind.
Exactly how many items can you put down before getting the loot bag, and how do you override it? I remember there was a way. Is it an .ini tweak or a console command?

I think it works exactly like it worked in Morrowind, but I don't know for sure. The page you were thinking about was probably http://www.uesp.net/wiki/Morrowind:Glitches#Overflow_Loot_Bag.

I guess the same amounts are valid for the PC and console versions of Oblivion (1024 items and 256 items, respectively).

EDIT: D'oh, I had forgotten to put the link to the page.

Ah... so is there an ini tweak to change the amount of items? I'd probably change it higher, just in case. It's hard to know how many items there are in my Battlehorn Castle though. Stuff that was already there counts, right?

I wouldn't worry about it, I personally haven't heard of anyone using enough clutter to get the overflow bag to appear on the PC.