Bit of a grey area. Interesting PFK article on the Animal Welfare Act guidelines this month (July '11, p17) with blog/article online under Staff Blogs, Nathan Hill, Friday 11 March. (My phone won't let me link the non-mobile format site, but it's easy to find.)
http
/www.practicalfishkeeping.co.uk/content.php?sid=3713
In a breeding situation, as this is what the OP is dealing with, culling is a necessary evil. Most everyone tries to save every fish they produce when they start breeding. This often involves separating the smaller, weaker, or deformed fry from the rest. They eventually die off, little by little, despite the best efforts. Often external problems also manifest themselves as internal problems, giving the fish a low probability of survivability from the start. In the wild these would be the first to be eaten by predators.
Where growout space is a concern, you are not doing the fry any favors by condemning them to a slow death due to an extremely overstocked situation. Being eaten in one bite by a larger fish is just as quick & painless as any other culling method, and certainly better than a slow death due to lack of room. In the wild, many small fish in a certain area would attract larger hungry fish, and be dispatched in short order.
While out tanks are not the wild, nature has been doing this for longer than we have walked the planet, and has been doing quite a nice job. This is something we can learn from, along with other aspects of aquatics observed in nature, to give our fish the best possible situation that we can.