You can’t park a satellite above a specific country. If you want a seatellie to have an uninterrupted view of Iraq you need to place it in geosynchronous orbit, and then it’d be too far to resolve anything. Spy satellites are usually placed in high inclination orbits so it can view any part of the earth a couple of times a day.
As for the resolution limit, as already mentioned, resolution is determined by the aperture size. You can’t fit a pre-assembled telescope larger than the Hubble into any existing launch vehicle. You need a deployable (folding) mirror or an interferometer with telescoping booms to surpass the Hubble. I personally don’t believe either one has been achieved by the military yet. Optical interferometry is an immature technology even for ground-based astronomy. The first non-military space telescope with deployable optics will be the JWST (formerly known as NGST), but its spatial resolution will be no better than the Hubble, and it won’t be launched untill 2010.