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It simply keeps going til it breaks (runs out of HDD space)
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Time Machine doesn't "break" or stop working when it runs out of space. It just starts deleting your oldest backed-up files.
You can't limit the size Time Machine takes up once you've started backing up, but you can partition the drive to limit backup space on a new drive. I have a 250 GB drive partitioned into a 100 GB Time Machine partition and a 150 GB storage partition for non-essential items (like Parallels VMs I rarely use) and temporary storage to keep my internal MBP drive clean. I've also had it set up with three partitions (one TM, one storage, one Carbon Copy Cloner image of my internal drive).