Your fix is a very simple one. Your camera is only compatible with SD cards, and you're trying to use it with an SDHC card.
SDHC is a later technical development of the SD to allow larger capacity. Your camera was designed and made when SDHC development was still just a vague idea for the future. 512MB was all that your camera was guaranteed to work with as they were the largest capacity cards then available. You may wish to look at the
user manual for yourself, page 170.
SD cards are available up to 4GB in theory, but in practice almost no SD device can go above 2GB, According to the
MyMemory website your camera will accept 2GB SD cards (see details), but from experience even if it works you may find that the camera operation becomes very sluggish when the card gets more than half full. You are also likely to find that at the maximum capacity your camera is very choosy about which brands it will work with reliably. Staying at or below 1GB should ensure the maximum usability.
There is no way to update your camera to the newer standard as the SDHC card requires different internal hardware and firmware.
I hope that you've found my solution to have comprehensively answered your question, please take a moment to rate my answer.