Yes, 4 GB RAM module works with no problem - first module I found worked.
Look here. It is article from times when G5 iMacs + Powermacs was oficially unsupporteg, but worked.

In bottom part you will find photo of working module. But I suppose any speed-compatible module should work. The 2.5 GB in specification is probably becouse these time 4 GB modules was not on the market. ( my speculation )