Why is there limitation on the project name length?

You must have a long path to the projects directory:
There is a maximum file name/path length etc inherent to each OS and VS has to respect that. The exact maximum character length for a filename is calcultated (up to an upper limit) and your solution parent folder path is part of it.
See MSDN how a project max path and solution name length is calculated[^] VS2010 might have a different way of working, but the principle will be the same.

I think you can leave with the quite a long simple name of the project (if you really need it) if you make full path name shorter. To do this, move your project solution closer to the disk root (I use something like c://myCompany.development/trunk).

Also, don't forget that your assembly name does not have to be the same as project name. You can have short project name and long assembly name or the opposite.

This is good. I'm only curious: why did you hit this limit? Is that because you really need a long name of the project (then, why?) or because you happened to put your development directory too deep into the file structure?