What is the largest level that can be created in WED or MED? Is it possible to create a level that is as large as a city?

your level can have an unlimited range, one important thing is you have to use LOD (level of detail).
Also you will have to make sure to remove everything that is not in the actual view.

Who told you that?

have a look at variables and trying to store coordinates larger than that.
If you need it larger than -1048577.999 to 1048576.999 try scaling down your models changing camera arc, possible but probably unneeded (simulate streaming).
Otherwise just load different levels to get what you need.

wouldnt it be easier to do the sub level or level stitching method to load the level pieces at a time, instead of an enormous level that will eat away at your framerate?

I have pushed 3DGS's Size limits to the far reaches of its capabilities...
If you look at the "Map Compiler" Dialog you will find that there is a variable called "Max Level Size" which is "250000" units....
What does this mean?
Well, lets say that you max out this variable at 250000...
Then you go into the level editor WED and you scale a terrain so it is huge and you center it....
If its size is beyond the 250000 limit, the compiler will pop up a message and scream at you...
So, scale down the terrain and try compiling again... until the compiler does not scream at you...
You then have maxed out your level size to its limit...
Then scale you avatar size to match the terrain... and then set your cammera distance from the avatar...
There is your max level size...
Of course, if you have other levels set the same way that launch... you can have an unlimited game size...
As far as frame rate... if you have multiple terrains and use terrain lod and cashing you can maintain a decent frame rate...
Using this concept will allow you to create simulations that far exceed a city size... you can create counties/states/provinces/countries.... UNLIMITED....