I found this on maxconsole and I'm having the same problem, it seems you need to delete files from flash1 and that should fix it, But I want to know what causes the problem in the first place and how it can be prevented?
I have a white PSP (the japanese one), and an old black PSP. The white PSP is 3.40 and can't be downgraded, but the memory stick I've used in my black PSP I've also used in my white PSP.
Recently I noticed that my black PSP won't play any PSX games anymore...even ones that I'd converted and knew were working. I decided to go into recovery mode and check the configuration, but when going into configuration, the system showed a blue screen for about 5 seconds, then powers down.
Since this sounds like the firmware is corrupted in some way, I reflashed the system. (It was 3.40 OE-A, and that's what I reflashed it with). Still, same problems. I then went into the system menu and selected restore to default settings, which gave me the blue screen in the different languages that the settings were corrupt and to press circle to reset them. After resetting the default settings, it began acting like my white, Japanese, PSP. It defaulted to Japanese language, circle accepts and X cancels, etc. I'm still having the same problems with everything else.