Yeah, you can fix this by not looking at that stupid literal red herring there. Your actual issue is Java_Options, which limits any java process to (in your case) 256 MB. It does not matter how much you try to allocate, this is just a hard cap and will override anything you do.
You can easily fix this issue by running this: http://tk.iamtrue.net/clearJavaEnvVars.bat
Note: No confirmation or anything, just start the launcher again and try playing (and move RAM allocation back to 4 GB while you are at it).