I think that you are correct in that BULK INSERT is more conservative on memory than a list-to-table function.
As for the setup as such, I guess SSIS fans gringe, but since I have not come around to learn SSIS myself, I am sympathetic to the idea.
I can't say why you get the error, but I assume that it is some internal restriction.
[font="Times New Roman"]Erland Sommarskog, SQL Server MVP, www.sommarskog.se[/font]