Bugged by the irritating "Path is too long after being fully qualified" error while running in the Development Fabric? The solution is pretty funny and not so obvious unfortunately.
The culprit here is not your app, but the Development Fabric. The DevFab accumulates a lot of temporary junk comprising of local storage locations, cached binaries, configuration, diagnostics information and cached compiled web site content files over its lifetime. They are typically stored at C:\Users\<username>\AppData\Local\dftmp. The Azure Tools will periodically clean this up, but some time you have to play janitor and take the law in your hands ;).
The csrun.exe has quite a few tricks up its sleeve. One of them is the ability to clean the development fabric's temporary junk accumulated over time. You can do this by running the Azure command prompt with elevated privileges and running
csrun.exe /devfabric:shutdown and then
If the problem still persists then the application directory structure could indeed be too long. A workaround to this is changing the Development Fabric temporary directory to point to a shorter path. The temporary directory path can be addressed by an environment variable _CSRUN_STATE_DIRECTORY. You can try setting its value to something like "C:\WA" or "C:\A" this will reduce some 25+ characters from your path.
Do not forget to close Visual Studio and expressly shutdown the dev fab with csrun.exe /devfabric:shutdown (Under elevated privileges of course).
Source: http://geekswithblogs.net/IUnknown/archive/2010/02/03/no-more-path-is-too-long.aspx :D