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I have the same inability to manually create a collection on the device itself. I can create dozens and dozens of them if I add tags to the metadata via Calibre, but when I tried to create a new one directly on the T1, I got that same "can't create a new collection because the limit has been reached - please delete some collections" message.
I can manually delete collections. I can move books into collections that have already been created on the T1 via Calibre. I just cannot create a new collection directly. I wanted to create an "Already Read" collection so I would know which books to add to my "Read 100 books in 2012" list on this website. In order to do so, I had to change the name of one of the Calibre-created collections and add the books to that (then delete the books that had belonged under the previous name).
I have no such problem on my Sony PRS-350.
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