What shape is your TV? You only use Letterbox if you have a 4:3 (old square shaped) TV but want to retain the aspect ratio of a recording.
If you have a 16:9 widescreen TV, you need to set the PS3 to 16:9
I don`t know what other options might be listed on the PS3 as I don`t have one. Try altering the settings until you find the right one.