You are using a very old version of Saxon (the 6.x branch) and the first thing I would do would be to move to an up to date version (the current version is 9.4). This won't necessarily solve the problem on its own, but at least it will make it possible to offer some support.
Recent Saxon releases have the option -tree:tinyc which uses the TinyTree model with extra compression, which may make a difference.
For a 200Mb input document, you should be able to do the transformation if you allocate 1Gb of heap space, or 2Gb to be safe (the expansion factor depends on the nature of the data. You didn't say how much you actually allocated.
If that doesn't work, or if the source document gets any bigger, you could look at some of the facilities offered in Saxon-EE such as streaming and document projection to see if they help.
Note that for Saxon-specific problems, it's best to use the saxon-help list on SourceForge. Asking here, it's hit-or-miss who happens to visit the forum on any given day.
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Michael Kay
http://www.saxonica.com/
Author, XSLT 2.0 and XPath 2.0 Programmer\'s Reference
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