Idan,

> Is there an option to create a GTiff with a sparse index?
[...] 
> Is there an option to eliminate this huge index

No, the index must be fully present in a TIFF file.

> or an alternative format
> that I can translate the vrt into and will be with a reasonable size?

The GeoPackage driver will not emit sparse tiles, but currently only with RGBA 
Byte data 
(when alpha=0 for a tile), or single-band Float32 (when data for a tile matches 
the nodata 
value)

Even

-- 
Spatialys - Geospatial professional services
http://www.spatialys.com
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