I think (check the docs to make sure I've got the switch right, or heck, just try it).
It appears to be a problem in generating new WAL files when your current WAL file fills up (thus the "it can only do so much and then dies" problem).
Do the steps I mentioned above and add "--debug" to your config (again, you may need to check docs). Then check your postmaster log to see what the problem is. If you're not logging postmaster output you can shut it down and just run it from a shell window and watch the output.
The cause could be something as incorrect permissions on a directory ... or it could be a real bug in PG 7.1.1 (hope not!) Feel free to post the debug log here, hopefully it will tell us something useful that, if necessary, can be sent of the the PG development folk.