I've been working a bit with tex-live. I now uses xz to compress their 
very large files (126M and 1.2G).  I note that it takes quite a bit more 
time to extract these files than bz2.  The tradeoff may be worth it, but 
the better compression is not free.

   -- Bruce

time tar -xf texlive-20110705-texmf.tar.xz

real    2m3.082s

This is on a reasonably fast system.
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