Lets assume 50% of the miners/clients were running bitcoin instances that accepted blocks over 1MB. It would look like the hashrate dropped in half to both sides.
Not quite, the accepting side would still see the mining of the non-accepting side. It's not mutually exclusive.
Basically 2 different versions of bitcoin would exist. Mtgox, blockchain, slush, deepbit, etc would all have to decide what side to take. Or they could even fight on both sides. Technically both could exist indefinitely.
Of course, the value of bitcoin depends on it not biurficating. That would be a maximally bad outcome: basically everyone with funds before the split would double their funds. So thats obviously highly unstable.
Same problem happens if advances in quantum computing make people want to use a different encryption method.
We don't use encryption in bitcoin. Perhaps you meant signatures? We can actually upgrade signature algorithms without a hard fork.