How can I label with qgis 1.7, based on attribute and scale of map?
For example scale>1:1000 then label all those features whose area>100000 at font size 12 and those features whose area<99999 at font size 5.
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This can't be accomplished with a single layer as far as I know (as per Nathan-W's answer) but you can do it with two separate identical layers and scale-based visibility. I don't have QGIS 1.7 installed anymore (using 1.8 & 2.0) but this should work:
When you zoom out past the 1:500,000 threshold one layer and its labels disappears and the other appears; this is nice when combined with different sizes of line widths and symbol sizes, too.
This currently not possible in any QGIS version. It's on the wish list for the future.