Apparently quite an important factor is if you have a graphics card with (for example) 1GB RAM (or SLi with 2GB total) as it becomes part of the 4GB limiting equation which for 32bit 'gamers' PC's is quite serious.
Further reading here.

Panoramas a best handled externally or prepared for the internal panorama tool prior to importing in my experience.
Also, another member contacted me with similar OOM errors trying to create a photo collage. His xar file became 150mb and caused big problems for him.
Again, best to prepare images before importing I think.