Is "Big Nose" really used for Westerners?
Yes, 大鼻子 is used for primarily white people, although it is regionally limited to the North East. See http://baike.baidu.com/item/%E5%A4%A7%E9%BC%BB%E5%AD%90/940166

It is not really used these days; when it was used it was mostly used to refer, pejoratively, to Russians, due to the history of conflict with China's North East. Another similar pejorative (and antiquated) term is 老毛子.

I would argue that the term is racist, as it is pejorative and was originally intended to be offensive, even if current users don't intend to offend with the term. You should not use the term in polite company.