Backup says "not enough space" but there is plenty !

I have a Western Digital 1 TB My Passport Essential SE that I'm trying to use to do a backup of my laptop (Dell XPS M1530) running Vista Home Premium SP2 64 bit. The internal HD is 300 GB which is mostly full. The first time I ran the "full backup" of the files, I already had 200 GB used on the Western Digital and knew that I had plenty of space. The external HD was formatted already in NFTS. After 12 hours or so, I got the message that I needed an additional 400 GB ! Without thinking, I formatted the external drive in NFTS. I ran the "full backup" of the files on my laptop again for 12 hours and got the same message. When I look at the files on the external drive after getting this second "need 400 GB more space" message, I checked to see what files were already copied to the external drive. There is roughly 140 GB worth of files copied on a "Backup files" folder and a "catalog" folder (both folders are in another "backup set" folder").

What does not make intuitive sense is that a 300 GB internal drive cannot backup to a 1 TB external hard drive. I did not copy down the numeric error message (0x007008.....) that followed the "not enough space" message.

Any suggestions on how to get past this issue ? I've been using this same WD external HD without any issues for awhile.