No, it doesn't 🙂 The SHA-1 algorithm always produces 160-bit output, here is the proof: http://en.wikipedia.org/wiki/SHA#Comparison_of_SHA_functions.

The warning is raised because allowed input values for the HASHBYTES function are limited to 8000 bytes (http://msdn.microsoft.com/en-us/library/ms174415.aspx). I consider this as some strange obsolete limitation which can hardly be explained for MSSQL 2005 & 2008.