Good question. The intuitive approach is to apply conservation of momentum, which would give you a length of $3/5$ meters. But why is angular momentum conserved in this system? After all, linear momentum is not conserved, and there is no obvious rotational symmetry to the system.
There may be a clever way of arguing that angular momentum must be conserved, but it's also straightforward to derive this fact. We can parameterized the system by a one-dimensional configuration space representing the angle $\theta$ by which the string has wound around the peg. As the string winds, it shortens: let $l(\theta)$ be the (monotonic decreasing, with $l(0) = 2$, but otherwise unknown) length of the string after it has wound by $\theta$.
Assuming the particle has mass $m$, the kinetic energy of the particle is $$T = \frac{1}{2}m [2\pi l(\theta) \dot \theta]^2;$$
since there is no potential energy the Euler-Lagrange equations are
$$\frac{d}{dt} \left(4\pi^2 ml(\theta)^2\dot\theta\right) - 4\pi^2 m l(\theta)\dot\theta^2 l'(\theta)=0$$
or
\begin{align*}
8\pi^2 m l(\theta)l'(\theta)\dot\theta^2 + 4\pi^2ml(\theta)^2\ddot\theta - 4\pi^2 ml(\theta)\dot\theta^2l'(\theta)&=0\\
l'(\theta)\dot\theta^2 + l(\theta)\ddot\theta &=0\\
\frac{d}{dt}\left(l(\theta)\dot\theta\right)&=0,
\end{align*}
and we see that $3/5$ meters is indeed the correct approach.