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In the Quest Watch window, clicking the left-most button (looks like a white "play" icon) brings out a drop-down menu. The slider "Max Visible In List" sets how many quests to show, and can aid in reducing the size of the quest watch window.
Additionally, in the Font menu, specifically under Quest Watch List Font, you can choose font, size, and spacing for the Quest Watch window, reducing the size even further.
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