After formatting my card with different settings, I've just found this to be the best for my SD card. You may need to adjust your cluster size a bit. I have always unchecked the Backup FAT option, and I believe this frees up some space on the card.
You can try formatting it first with a PC SD Card reader using Windows, then try to format it using PM. Another great SD card management app is Soft Winters Storage Tools.
u can also do it on a pc (of course u need a card reader) if you go to start->run->diskmgmt.msc (assuming u are runing windows XP) u can select your card and format using a desired cluster size and fat 16/32.