The folder gallery by default will use that top level folder /Data/Sites/[SiteID]media/FolderGalleries as the root folder of the gallery, any sub folders below that will be a group within the gallery. If you want the sub folder to be the root folder then you complete the path to the existing folder. So for example if a folder exists below FolderGalleries folder name vacation2013 then to make the root folder of the gallery you just enter it in the textbox. To use a folder below that separate the folder names with /
Note however that the folder gallery requires that the folder and image files have no spaces in their names so if you upload by ftp folders and files with spaces it isn't going to work. You should change the spaces to - or _
As far as file upload problems, everything I know to help you troubleshoot the problem is in the article Supporting Large File Uploads.
Hope that helps,