The model that loads the country information for use in the config is Mage_Adminhtml_Model_System_Config_Source_Country
Here it will load all the options from the directory country collection and return them as an options array.
The collection class is Mage_Directory_Model_Resource_Country_Collection
$this->_options = Mage::getResourceModel('directory/country_collection')->loadData()->toOptionArray(false);
Completely new countries would need to be added in the correct tables.
- directory_country
- directory_country_region & directory_country_region_name
There would then need to be a new entry in the Locale Data xml file under /lib/Zend/Locale/Data. After making these changes you will need to clear you cache.