I've been getting this error for at least 6 months now, and through every Defraggler update that's occurred in that time.
I'm using WinXP SP3. While there was plenty of space on the disk I was using at the time the error began to occur, I've since updated to a WD5001 SATA drive and, in the 52GB partition I'm using, 33GB are free. Same problem.
I did save the error message screen using Paint. Sorry, it's tiny and I don't know how to make it larger.
Defragging the remaining files via the list after the error does work. I had read in the forum that someone else with the same problem did that, so I gave it a try..
I'll first try the portable version, then go back and install a version from a year ago, if necessary.
The usual cause of Defraggler throwing up that one is not because of insufficient free space, but because of insufficient contiguous free space, linked to the fact that "Move large files to the end of the drive" is selected and the drive contains some very large files.
In your case your screenshot seems to indicate that may not be the case.
The guys have already suggested the other option, so that's all I've got.
Well, after running some programs that might have cleaned up the registry a bit, I went back to Version 1.21.209, and that ran fine. But it was a pretty light defrag, so I'll wait and see how it does after a week or so. If that's OK, then I'll gradually install newer versions until I either run into trouble or get to the most current version without problems. I'll report back.