I've done this before with no ill effects. I've made a few 2 and/or 2.5 gallon batches; I simply adjust the chosen recipe by a factor of 40-50%.
EDIT: A good tool to have if you are going to do this is a good digital (or otherwise) scale that measures to very small increments (1/4 of ounce, etc.). Sometimes measuring out 40% of the ingredients can become a little difficult to do without a good scale. You can always "guesstimate" (for example for 40% of an ounce of hops you could take a 1oz. pack of hops and divide into 5 equal piles to get a 1/5 oz., then use 2 of the piles) and make good beer, however being exact is always better!