Great post, bible_belt.
I like the comment about being respectful and respected by your peers, to the point where people will take the initiative and stand up for you when you get insulted. I know of people like that, and I've personally stood up for many great people with unfortunate handicaps. As has been noted, those with bark don't bite. Look at guys like Jens Pulver, Manny Pacquiao, Israel Vasquez/Rafael Marquez (the two must always be mentioned together), and others. These guys are short, some about 5'4, competing as low as 118lbs! Despite being world-class fighters, they are very humble and likable people, and there are cavalries of people who would support them if they were ever insulted about their size.
My point is there's no need to compensate for your size, even the toughest guys in the world don't do it. I'm surprised noone at the bar told that azhole to shut up, that was a terrible thing to say. In high school I can see that happening, but I don't see that often among mature people. A quick retort could have been "Ya well that midget can outdrink you", said with a smile and a stare. The point is to show that you're not offended, but you're also confident enough to engage, and not afraid of the consequences.
If you have good nerves and can articulate, you can throw his prejudice back at him, in a way that makes him look ignorant, and makes sure he can't attack you, lest he is the bad guy in the situation. Like "A short joke eh? how creative...
1) and if I called you (cracker, scrawny, metro, homo, monkey, etc.) I bet that would be really funny, right?" (Said without a smile, with disgust at his comment. You'll earn the support of every person whose been called a cracker, scrawny, metro, homo, or monkey. I've used this before when people made fun of my name, BUT, you have to make sure you don't sound like you're insulting that group. Last thing you want is a bar full of black guys turned against you - turn those black guys against him!)
2) Whatever makes you feel like a big man. Maybe you should get a bigger car or something?" (You say this with a smirk, but don't look directly at him! it looks like you don't even respect him enough to look him in the eye, and you just shrug it off, and continue your conversation. One of the forgotten traits about dominant males is they often DON'T look you in the eye, because they consider you beneath them.)
Our physical appearance is unfortunately among the defining features of our likely status attainment. When you're on the losing end of the lottery, it sucks, real bad. Just remember that confident and accomplished people are typically friendly and accepting, so you can show yourself to be that by not getting offended or losing your nerve, rather looking mature and secure.
If you're in a 1-on-1 situation, it's different, there are no witnesses, you might just have to take the risk and step to him. Like that co-worker, maybe you couldve said "ya and how about I dunk your head in the urinal?" with a mock laugh like "Ha ha ha". You run the risk of being attacked, but most of the time, they'll just back off and make a nervous joke. And if you are attacked, most likely you will get the sympathetic response when it comes to light.
Another tactic that works is being very explicit about what just happened. Don't ignore the topic - rather emphasize the fact that you were insulted. Like "what's your problem man? im just taking a piss and minding my own business, did someone sh!t in your breakfast or something?" Most of the time they'll backtrack or change the topic and not mention it again, people don't like to think of themselves as rude or mean people, and if you make it very clear that you were insulted and did them no harm, they won't do it again. Just don't come across as a whiner, more like a mature person who is standing up for themselves, without losing their nerve. You might also remind them of a time that they were made fun of, and they will avoid doing it again out of guilt.
The point is, people do not like to be put on the spot. If someone puts you on the spot, don't ever try to downplay it, instead show you're comfortable being stared at, and put THEM in the spotlight. Most people can't overcome their insecurities when being the centre of the attention, so give them an audience and they will become nervous and try to get out of it. At the very least, ACT as if you are comfortable with an audience, just long enough to make the audience turn to him. The key is to always throw the ball back at him, because most of the time, they'll fumble it.
I have quite a bit of experience with this stuff unfortunately. I find that ignoring it is the worst thing to do. People I was with often didn't care or see me any differently, they just shrugged it off and continued like normal. The problem was that I felt so embarrassed, I had to leave them, I felt too inferior to be hanging around them. Most people are too caught up in their own world to care much about what's going on outside of it, they will laugh, or feel awkward or whatever, just for a few seconds, then continue rolling in their own filth.