db size and VACUUM ANALYZE

Hello,

The db in the application I maintain but didn't write (it obviously
makes use of PG, v 8.3), has been systematically growing in size from
about 600M to 1.6G.

At the same time, the performance of the app has degraded significantly
(several times).

So I've done VACUUM ANALYZE on entire db. Nothing. The db did not
decrease in size, the performance stayed the same.

So I backed it up using pg_dump, deleted database, and recreated it from
backup.

The size of db on disk went down to 600M, performance recovered to the
original level.

Why that is so? I thought that VACUUM ANALYZE does everything that is
needed to optimize disk usage?

Regards,
mk