I think a 32 bit JVM has a maximum of 2GB memory.This might be out of date though. If I understood correctly, you set the -Xmx on Eclipse launcher. If you want to increase the memory for the program you run from Eclipse, you should define -Xmx in the "Run->Run configurations..."(select your class and open the Arguments tab put it in the VM arguments area) menu, and NOT on Eclipse startup
Edit: details you asked for.
in Eclipse 3.4
1) Run->Run Configurations...
2) if your class is not listed in the list on the left in the "Java Application" subtree, click on "New Launch configuration" in the upper left corner
2b) on the right, "Main" tab make sure the project and the class are the right ones
3)select the "Arguments" tab on the right.
this one has two text areas. one is for the program arguments that get in to the args[] array supplied to your main method. the other one is for the VM arguments. put into the one with the VM arguments(lower one iirc) the following:
-Xmx2048m
I think that 1024m should more than enough for what you need though!
4)Click Apply, then Click Run
5) Should work :)