(I suppose you do not really mean DOS, but refer to cmd.exe.)
I think it is less a CLASSPATH limitation than an environment size/environment variable size limit. On XP, individual environment variables can be 8k in size, the entire environment is limited to 64k. I can't see you would hit that limit.
There is a limit on windows that restricts the length of a command line, on WindowsNT+ it is 8k for cmd.exe. A set command is subject to that restriction. Can it be you have more than 8k worth of directories in your set command? You may be out of luck, then - even if you split them up like Nick BerardiNick Berardi suggested.