Glad,
The smallest possible engraving is limited by how accurate your machine is, the cutter type used / size and depth of cut.
You may want to have a look at this thread as it shows some small lettering work.
http://www.machsupport.com/forum/index.php/topic,13398.msg87957.html#msg87957Let me elaborate some....
The best point you will put on an engraver / cutter is say .001 wide and even that breaks in butter, so lets say .003" in dia.
Then lets say you have .002" runout at the tip of the cutter. So the width of a line is approx .005" wide , but if you go .002" deep
it may be .006" wide. Now lets just take the letter "E" which has three lines and two spaces ( lets say .003" clear to edges of cut / that's a human hair) , then total for the letter "E" would be about .024" high. Do some testing with your machine and cutter and see where it's no longer visibly a letter.
Have Fun,
RICH