Nios running on SRAM vs DDR2 ?

If the problem is only pcb space, I think cy7c1380, too, is available in a bga package.

Anyway, ddr2 like any dram memory have a much lower cost per bit compared to sram, so it could be convenient for saving $$ besides saving space, especially if you need a big memory.

The major problem with DDR2 is designing pcb. Unlike sram, ddr2 devices don't use LVTTL signaling but SSTL 18. This signaling standard requires impedance matching and a careful design of traces in order to avoid transmission problems.

Apart this point, DDR2 then works much like an usual sdram, so all pro-con comparisions between sram and dram apply.