As far as I know all distributed revision control systems require you to clone the whole repository. For this reason is it not wise to put huge amounts of content into one s
As of version 2.0, it is not possible to make a so-called "narrow clone" with Mercurial, that is, a clone where you only retrieve data for a specific sub-directory. We call it a "shallow clone" when you only retrieve part of the history, say, the last 100 revisions.
As you say, there is nothing in the common DAG-based history model that excludes this feature and we have been working on it. Peter Arrenbrecht, a Mercurial contributor, has implemented two different approaches for narrow clones, but neither approach has been merged yet.
Btw, you can of course split an existing Mercurial repository into pieces where each smaller repository only has the history for a specific sub-directory of the original repository. The convert extension is the tool for this. Each of the smaller repositories will be unrelated to the bigger repository, though — the tricky part is to make the splitting seamless so that the changesets keep their identities.