I am installing a 200 amp,underground residentual service.
my ungrounded service leads will be - wire size 4/0.
my question is, can i use a smaller size wire for my grounded netural?

tkrussell

Yes, but only if the appropriate calculations are done. Installing reduced size neutral is not done very often by contractors, esp for small services, simply because the savings is minimal, and if the calcs are not done correctly, more damage can be done that certainly exceeds the savings.