Reformat it using your computer and try again.

http://www.dcemu.co.uk/vbulletin/showthread.php?t=7231

There's something there about formatting in FAT32 being bad, or that you'll need to format it in FAT16 being native to PSP etc etc.

After formatting it so the PSP can read the card, a REFORMAT using the PSP again should fix all hassles.