We propose the effective dielectric function theory of metal granular composites modified with the metal particle size. The modified theory is used to explain the electrical conductivity, resonant plasmon absorption, and large nonlinear absorption of Au-TiO2 granular composite films with high-density metallic particles and a high electric percolation threshold. It is revealed that the decreasing metal particle size leads to an increasing percolation threshold and large enhancement of optical nonlinearity of the composites.