My contractor told me that the tiles I chose, being 800mm by 800mm, is larger than the inital 600mm by 600mm he expected me to choose.

Therefore, he is telling me that there is an additional $1.20 psf of labour cost involved for the reason that:

"600 tiles are cut using machine, while 800 tiles are cut manually by hand"

Is this a market practice or is my contractor just a blood-sucker?

As I see it from a layman POV, bigger tiles means that he needs to lay each tile fewer number of times (and also less number of tiles to cut) and therefore saves on labour cost. I'm not sure why different cutting methods incur different costs. Could anyone enlighten me?

well, as a layman pov, most of us are thinking tilera are short changing us. however, bigger tiles= heavier tiles =bigger cutting tools = bigger leverage when laying tiles = more difficult in laying tiles, and in same instance 800 or even 1m tiles sometimes need 2 tiler just to align/carry around. I do not know the market price increase for using 800mm tiles, but I do know it is more expensive than 600mm tiles.