What to do when FileVault won't turn on

See if you can create a brand new admin user account that has File Vault enabled.

http://docs.info.apple.com/article.html?path=Mac/10.5/en/8235.html

If that works, and no other solution is forthcoming, you can migrate your data to that new account and start using it as your main account.

I was able to create a new admin user account and turn on File Vault in that account. But I created it as a regular account, logged into that account, and then enabled File Vault from System Preferences Security pane. Did you do it that way, or enable File Vault at the same time the account was created? Maybe it would make a difference in your situation to do it the other way from the way you used.

In Disk Utility, are you able to create a

File -> New -> Blank Disk Image

*with encryption* ? I believe that is similar to what File Vault does, which is to turn your user home folder into an encrypted disk image file and mount it as your home folder.

The only other suggestion I can think of is related to your free space remaining. Since this is a MacBook Air, the storage may be a bit limited already. Is there any way for you to temporarily off-load some of your data to increase the free space. My theory here is that although you may have more space than is required by your user home folder, it may be sufficiently fragmented into small pieces so that File Vault is unable to do what it needs to do.

If you have AppleCare, you may want to contact the formal tech support at Apple using the AppleCare phone number

(800) APL-CARE (800-275-2273)

You can also report this as a bug in Mac OS X, using the feedback page

http://www.apple.com/feedback/

(although that won't help with your immediate issue)