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I would not recommend capturing over USB in Premiere Elements -- even though it supposedly works with USB Video Standard 1. The results are too inconsistent and problems, at least in my experience, are common. It's really a pretty obsolete video capture method.
Try it with FireWire and you'll likely see the problem go away.
But it still might not hurt to make sure everything is updated on your computer -- that you're using XP SP3 and that you have the latest Quicktime and firmware for your graphics card.
After you update the drivers(firmwares)try doing the USB streaming again before moving to the firewire capture.
Thank you for your suggestions, here are my experiences:
I did both a graphics card update and a Quicktime update without any effect on USB capturing - same error as before.
Firewire capturing fixed the problem. However, another problem emerged but I'm not sure it is related.
After capturing 30+ minutes, PRE 7 froze when doing smart tagging. Afterwards I could not open any projects, the program just minimized and failed to respond. A system restore was not enough, but after reinstalling PRE 7 it seems OK - with the old drivers and Quicktime.
You can disable smart tagging after capture if not required.