I have a number of adgroups with several hundred keywords (possibly not best practice, but the variations are very tight and long tail, and this particular campaign is HUGE). It's not against the Terms of Service, and doing this will not get you banned.
Utilise keyword insertion in your ads, this will insert the users "search query" in to the title of your advert appealing more to the end user and can increase your CTR This will also make your ads more relevant which in tern can increase quality score & potentially lower your CPC's
Thanks for the information... it is really helpful for the newbie adwords users like me who are thinking to use adwords.