So even though I read this post by Duncan http://www.yellow-bricks.com/2009/11/10/block-sizes-think-before-you-decide/

It was too late for me. I had already created a VMFS with too small of a block size. It boils down to what is your workingDir. In my case the workingDir was on a 1MB Block size volume. I ran into this almost exact same problem as written here. http://www.yellow-bricks.com/2009/08/24/vsphere-vm-snapshots-and-block-size/

Disk01 – 10GB stored on VMFS001 with a 1MB Block size
Disk02 – 350GB stored on VMFS002 with a 4MB Block size

VMFS001 contains the working directory of the vm “virtualmachine001″. Snapshots are stored in the working directory. In the case of Disk02 this could mean that the delta file grows beyond the maximum file limit of 256GB of VMFS001 where it will be stored.

Luckily, I think I can migrate data back to my Disk01, delete my Disk02 and then storage vmotion off to a bigger blocked Datastore! Hopefully….