I never use RESTORE DISKS or especially RECOVERY PARTITION (restore software) to restore my operating system!
Because today there are so many malicious software which can infect or/and completely screw up the partition and all data on it together with the "restore software" data.Usually the "restore software" data is logically stored in one or multiple files or/and folders (depending how they did it).And EVERY SINGLE file can become infected or changed by a malicious software and for that reason if you restore an operating system from those infected/damaged files (recovery software data) then the restored operating system might not work at all or it could work like crap.In some cases like these you might not even be able to restore an operating system.
And that sucks...
Every time I buy a new laptop for example,I
ALWAYS erase the entire HDD with tools such as Kill Disk and then I use my own Windows disk to FORMAT the entire HDD,create one SINGLE partition which uses the ENTIRE HDD and THEN install an operating system and drivers on THAT partition.
After I did that,I of course install everything I need,adjust ALL the options just the way I want and after that I FINALLY clone my entire drive on a separate external drive (in this case my UAC data device I made for myself) so I can easily restore that in the case of a disaster.And no...I never use any cloning software.I do it manually using simple Linux Ubuntu CD-ROM disk with which I just copy EVERY SINGLE FILE AND FOLDER into an empty folder on my external drive.
It seems a little bit weird way I admit,but it is just the way how I do it for myself and it works perfectly.And the best thing is that on this way you can ALSO apply it on ANY other computer no matter what hardware it uses.Even if it's 100% different.On that way I do NOT need to reinstall and readjust absolutely anything. 
Of course logically if you put the clone on other computer with different hardware the ONLY thing you will NEED to install are the drivers for that hardware (and adjust the options in them if you want to).But EVERYTHING ELSE will already be installed and adjusted completely the same as it was made on the original PC.
And the best thing is that the way of how I clone my drives and the way of how I am able to transfer the clone to completely different computers and make it work perfectly applies all the way to Windows 95 OS or newer!!! 
Pretty cool ha? 
And the reason why I don't like the RESTORE DISKS is simply because most of them do not completely erase the drive (such as Kill Disk) before installing an OS.True you can always erase the drive with the Kill Disk before installing an OS from the RESTORE DISK,but most of the RESTORE DISKS do not even format the drive properly before the installation.Most of them just perform a quick format (quick drive clean).
And also they install bunch of unneccessary crap of software together with the OS.
And that also sucks...
If you install games and programs on the new drive,they will work just fine.
Today there are really rare programs which can be installed ONLY on the C: drive.So you don't have to worry about that.
As for your Steam games,the answer is the SAME.Feel free to download the game through Steam on your new 1 TB drive.It will work just fine.
All installed programs and games save their settings MOSTLY on the partition on which the OS is installed logically because there is also the OS REGISTRY located.Of course not ALL programs and games settings are stored into the registry.Some are stored in simple text files,some in XML files,some in INF files,some in INI files blablabla...That depends on how the programmer(s) made his/her/their program(s) or game(s).
For example...the Steam application settings are stored in the registry.
But Valve could have also easily make it to store it's settings in some RTF text files in it's own folder if they wanted to.It doesn't matter.It's just the way how they decided to make it.
So in this case if your Steam application is installed on D: drive,but your OS is installed on the C: drive,the Steam application WILL WORK,but
it will still store all of it's settings on the C: drive because the Valve programmers made it to store it's settings in the OS REGISTRY and since the OS is installed on the C: drive then logically the REGISTRY is then also on the C: drive where all the Steam settings are stored into.
As for you wanting to download the games through Steam ON your new 1 TB drive,YES you CAN do it and it WILL work perfectly.
And the answer is the SAME as above.All your downloaded games WILL be stored on your 1 TB drive (if that's the location on which you decide to store them on to),but
it will still store all of the game settings on the C: drive because the Valve programmers made the games to store their settings in the OS REGISTRY and since the OS is installed on the C: drive then logically the REGISTRY is then also on the C: drive where all the Steam game settings are stored into.
NOTE: Some options (settings) of the Steam application as well as the Steam games are stored in FILES within the folder in which they are located!
The reason for that is the same as above.Valve programmers simply decided to make it that way.
Cheers!