I did change xorg.conf for bigger virtual resolution, now the xrandr doesn't complain about small screen, but I run into different problem.
Almost everything I ask xrandr to do with one output, it does it with both of them.
Here are some examples and additional information about xrandr:

xrandr -v
Server reports RandR version 1.3

xrandr -q
Screen 0: minimum 320 x 200, current 1280 x 1024, maximum 2560 x 1024
VGA-0 connected 1280x1024+0+0 (normal left inverted right x axis y axis) 376mm x 301mm
   1280x1024      60.0*+   75.0     72.0     60.0*
   ... some more modes ...
DVI-0 connected 1280x1024+0+0 (normal left inverted right x axis y axis) 376mm x 301mm
   1280x1024      60.0*+   75.0     72.0     60.0*
   ... some more modes ...

xrandr --verbose --output DVI-0 --pos 200x0
screen 0: 1480x1024 432x298 mm  86.99dpi
crtc 0:    1280x1024   60.0 +200+0 "DVI-0" "VGA-0"
* does move BOTH screens right by 200px

xrandr --verbose --output DVI-0 --off
crtc 0:    1280x1024   60.0 +0+0 "VGA-0"
* the single command which actually works only at desired output, and NOT at both, this one does switch the LCD at right off, and the LCD at left remains ON

Any other variation trying to set VGA-0 and DVI-0 to have correct mode+position to cover whole virtual screen leads to both LCD show either left or right portion of virtual screen, but always the same one, i.e. cloned view.

Final puzzling bit of information for me:
xrandr --verbose -q
Screen 0: minimum 320 x 200, current 1280 x 1024, maximum 2560 x 1024
VGA-0 connected 1280x1024+0+0 (0x4d) normal (normal left inverted right x axis y axis) 376mm x 301mm
        Identifier: 0x4b
        Timestamp:  438515
        Subpixel:   no subpixels
        Clones:     DVI-0
        CRTC:       0
        CRTCs:      0 1
       ... rest (panning and stuff, transform, EDID_DATA, list of modes) is very likely not interesting in this case...
DVI-0 connected 1280x1024+0+0 (0x4d) normal (normal left inverted right x axis y axis) 376mm x 301mm
        Identifier: 0x4c
        Timestamp:  438515
        Subpixel:   no subpixels
        Clones:     VGA-0
        CRTC:       0
        CRTCs:      0 1
        ...

* the puzzling bit is "Clones:" line. This doesn't sound right.

After xrandr --output DVI-0 --pos 200x0 the verbose query reveals:
Screen 0: minimum 320 x 200, current 1480 x 1024, maximum 2560 x 1024
VGA-0 connected 1280x1024+200+0 (0x4d) normal (normal left inverted right x axis y axis) 376mm x 301mm
        Identifier: 0x4b
        Timestamp:  438515
        Subpixel:   no subpixels
        Clones:     DVI-0
        CRTC:       0
        CRTCs:      0 1
        Panning:    0x0+0+0
        Tracking:   0x0+0+0
        Border:     0/0/0/0
        ...
DVI-0 connected 1280x1024+200+0 (0x4d) normal (normal left inverted right x axis y axis) 376mm x 301mm
        Identifier: 0x4c
        Timestamp:  438515
        Subpixel:   no subpixels
        Clones:     VGA-0
        CRTC:       0
        CRTCs:      0 1
        Panning:    0x0+0+0
        Tracking:   0x0+0+0
        Border:     0/0/0/0


IMHO the driver is forcing both outputs to be clone of each other and requires either further xorg.conf options (maybe definitions of two devices like in good old times when everything worked after 5min of configuration trough script), or it does not support dual head at all (???).

I'm adding my current xorg.conf which was used when testing xrandr.