I does support compression but you're going to need a lot of space to begin with. My advice is at least x2 the amount of free space. The image will usually end up about half the size in the end. My 22 GB installation usually trims down to 10 GB.
There used to be an app called DMGscissor that would split Mac OS X disk images, but I can't find it anymore, and it was never made into a Universal Binary.
Though the app appears to be gone the functionality is still there. You just have to use the Terminal to do it. I must admit, though - the effort required to make a GUI front-end for the command-line tool in AppleScript Studio wouldn't be much at all, and would be something I'd be interested in making in my spare time.