In my code I am manipulating/creating/destroying in memory representation of
big XML file (as in a few MB of CDATA in them (embeded bitmaps)).

At some stage (and I am in no way under any memory stress as my application
is using only about 500MB of memory and I have 1GB free, without counting
the virtual memory) I have this out of memory exception happening, in code
snippet looking like that:
=====
 public static void WriteXml(System.Xml.XmlWriter writer,
IEnumerable<string> resources, IResourceProvider provider)
 {
  writer.WriteStartElement("Resources");

  writer.WriteElementString("ResourceProvider", provider.ID.ToString());
  List<string> resourcesWritten = new List<string>();
  foreach (string resource in resources)
  {
   if (resourcesWritten.Contains(resource))
    continue;
   writer.WriteStartElement("Resource");
   byte[] data = provider.LoadData(resource);
   writer.WriteElementString("ResourceName", resource);
   string b64Data = Convert.ToBase64String(data);
   // ========== OutOfMemoryException below
   writer.WriteElementString("base64Data", b64Data);
   writer.WriteEndElement();
   resourcesWritten.Add(resource);
  }
  writer.WriteEndElement();
 }
=====
the error stack is:
====
 System.Xml.dll!System.Xml.XmlWellFormedWriter.WriteString(string text) +
0x55 bytes
 System.Xml.dll!System.Xml.XmlWriter.WriteElementString(string localName,
string ns, string value) + 0x29 bytes
 System.Xml.dll!System.Xml.XmlWriter.WriteElementString(string localName,
string value) + 0xb bytes

====
When I look at the internal of the various object involved with the debugger
I could see that:
data.Length ~= 7 Mb (~ 7 e+6)

and "Writer" is wrapper around a StringBuilder which MaxCapacity is around 2
GB (2e+9) and which current Length is "only" about 25 Mb (25e+6).

Now, all these numbers are huge I agree, however my memory isn't stressed at
all (i still used much less than my physical memory, virtual memory
notwithstanding)).
Any idea why I have OutOfMemory exceptions? how to get rid of them?