JRE fails to load with large runtime parameter value

Try to run a particular applet requiring higher runtime parameter value. It fails to initialize with Java Plug-in Fatal Error message "The Java Runtime Environment cannot be loaded" followed by "Several java Virtual Machines running in the same process caused an error".

Steps to reproduce this issue:
System configuration:
OS: Windows XP SP2
The installed JRE version is: Java(TM) SE Runtime Environment (build 1.6.0-b105)
Browser: IE7
RAM: 512 MB
Applet url:
http://www.duckware.com/pmvr/index.html (See PVMR Example on the web page)

Steps to reproduce:
a) Change the Parameter settings to a higher value (-Xmx756m) in the Java Control Panel
Note: see attached screenshot

b) Run the applet from browser (IE 7)
Most likely, you should receive the error messages as below:
Java Plug-in Fatal Error message "The Java Runtime Environment cannot be loaded"
followed by
"Several java Virtual Machines running in the same process caused an error".
Press "OK"
This step will ask about installing active x control which will lead to the message with red x:
Java support is required for panoramic images.
Note: For reference see the attached images in sequence.

3) Now, close the browser and change the Parameter settings to -Xmx300m as suggested in the applet help page at:
http://www.duckware.com/pmvr/howtoincreaseappletmemory.html

4) Run the said applet again from the browser:
http://www.duckware.com/pmvr/index.html
This time the applet run normally and you should be able to view the (PVMR Example - Upper Front Porch 360).

The change in Parameter setting is suggested for following reasons:
Problem: The Java plugin in your web browser has run out of memory
Cause: The memory limit for the Java plugin is usually around 60-90 MB
Solution: Increase the Java Applet memory limit
For detailed explanation, please refer:
http://www.duckware.com/pmvr/howtoincreaseappletmemory.html

This bug is always reproducible.