I also had this problem. In my case the reason was the (normally not visible) $RECYCLE.BIN folder which has been created by my Windows.
When I delete files from my usb-drive, the $RECYCLE.BIN folder grows up. So after a time the usb-drive has had less than 5% of disk space left.
As the wdtv needs approximately 5% free disk space of the partition to create the library, it caused the error message "unable to create media library".
Solution: From time to time I have to delete the $RECYCLE.BIN folder.
Notice: On my ext3 partition I certainly don't have this problem as ext3 is not a known file system for Windows.
WD TV Live with 1.03.49_V_WDLXTV.COM_WDLXTV_LIVE-0.4.7.3
USB1: WDElements 1TB ext2, USB2 with 4xHub: WDElements 1TB ntfs, WDElements 2TB ext2
Second WD TV Live with original 1.04.31_v
USB1: Trekstor 1,5 TB ntfs, USB2: WD Elements 1,5 TB ntfs