That is an unusual situation that you are presenting.
Have you updated from 12 to 12.1 via the project's Help Menu/Update? If not, please do so.
Do you have the latest version of QuickTime installed on your computer with Premiere Elements 12 on Windows 8.1 presumed 64 bit?
The usual drill
a. What is your project preset? What are the properties of your sources media? What is the brand/model/settings of the camera recording your mp4 and jpeg.
What are the pixel dimensions of these jpeg images and how many of them are there in the project (especially when the problems set in).
b. What is the size/duration of your Timeline content when the program no longer accepts new files?
c. Describe status of your computer resources. Also, where are the Scratch Disks directed and how much free hard drive space is at that location(s)?
Troubleshooting for Unexpected/Unexplained project problems...Deletion of the Adobe Premiere Elements Prefs file and, if necessary, the whole 12.0 Folder in which it exists.
Local Disk C
and in the 12.0 Folder is the Adobe Premiere Elements Prefs file that you delete. If that does not work, then delete the whole 12.0 Folder in which the Adobe Premiere Elements Prefs file exists. Be sure to be working with Folder Option Show Hidden Files, Folders, and Drives active so that you can see the complete path cited.
Let us start from the above and then decide what next.