You shouldn't try to fit your code in that bookmarklet...! Updatability issues aside (your original, server-loaded approach is absolutely valid), there definitely are limits to a bookmarklet's size, just as there are browser-specific limits to URL length... See: http://stackoverflow.com/questions/417142/what-is-the-maximu...

EDIT: _jb's right regarding the security concern though; the server-hosted code could be changed to something malicious after everyone has installed it