Can somebody help me as to how can I Disable or Reduce the size of Add Item Modal Window?

This can be done in k2 templates files. Change xy params (e.g. x:990,y:650) to fit your needs...

..\components\com_k2\templates\yourtemplatename\category.php
about line 46
rel="{handler:'iframe',size:{x:990,y:650}}"


..\components\com_k2\templates\yourtemplatename\category_item.php
about line 30
rel="{handler:'iframe',size:{x:990,y:650}}"


..\components\com_k2\templates\yourtemplatename\item.php
about line 29
rel="{handler:'iframe',size:{x:990,y:650}}"


Regards,
LN