There is no way to do this in iPhoto, as what you're doing is destroying data, and iPhoto is built to expressly avoid this.
So, File -> Export, set the Kind to Jpeg and then choose from the Quality setting as appropriate. Export the images to a folder on the desktop.
Trash the images from iPhoto.
Import the exported ones.
Note some things 1: You lose your lossless editing history and Faces data at the very least. If any of the images are used in Books, Slideshows etc then these will have to be remade.
If space is an issue, have you considered moving the Library to a larger disk - an external, for instance? It's easy:
Make sure the drive is formatted Mac OS Extended (Journaled)
- Quit iPhoto
- Copy the iPhoto Library from your Pictures Folder to the External Disk.
- Hold down the option (or alt) key while launching iPhoto. From the resulting menu select 'Choose Library' and navigate to the new location. From that point on this will be the default location of your library.
- Test the library and when you're sure all is well, trash the one on your internal HD to free up space.