psql freezes loading large file

I have a test ".sql" file of the form:
insert into testtable values ('1');
insert into testtable values ('2');
insert into testtable values ('3');
....
100 Million

Right before I call the file with "\i" I do a begin transaction.
At some point during the load the process stops.
After some 5+ minutes of not seeing the inserts go by I pressed CTRL+C and
got the errors:

psql in free(): warning: recursive call
xmalloc: out of virtual memory
xmalloc: out of virtual memory

Tried without calling begin transaction and got the same problem.
Did psql ran out of memory?
When I did it without begin I did a select count(*) from the table and only
472 records got merged. Can't imagine psql running out of memory after
loading such small amount of records.

This is postgresql 8.1.3 Running on FreeBSD 6.1