Looking at your textures and objects from your screenshot, 32x32 is likely not the correct size. It seems more like it's around 64x256 or bigger. A 0.2 scale would make this block seem more like a 320x1280, and even that size shouldn't be giving that error (I've had bigger yet without it). You sure have a puzzle to solve. A texture scale of 0.2 is not really recommended. 0.5 is the lowest recommended value and below 0.25 isn't worth it.

Light posts are roughly 12 feet high. At the normal map scale of 16 quants to 1 foot (provided you are using that), the buildings are 192 quants high. They are also very long making them probably 960 quants wide. At that size, you will certainly get that error (simulating a 960x4800 quant block). The only solution I have is to change the texture scale from 0.2 to something around 0.5. Either that, or take out MED and use it instead.