Here is a capture pic from my TVs resolution when my HTPC is on (via HDMI).
Its kinda crappy but you can see that the resolution is set to 1920x1080
"TV can receive the video and audio signal simultaneously with using a HDMI cable.
If the digital set-top box supports Auto HDMI function, output resolution of the digital set-top box will be automatically set to 1280x720p.
If the digital set-top box does not support Auto HDMI, you need to set the output resolution appropriately. To get the best picture quality, adjust the output resolution of the digital set-top box to1280x720p."
From what I understand, that means that TV IS capable of 1280x720 output.
And kindly trust me when I m saying that I have seen this TV outputting 1080i from PS3 through HDMI.
Despite of that, I tried again your suggestion. Plugged my PS3 in my HDMI PC monitor, selected HDMI and manually set resolution to 576p only. Unfortunately when I plugged it back in my TV problem was still there.
I have already tried both your suggestions my friend, unfortunately none worked.
I believe its my TVs problem but what is driving me crazy is that all other devices connected to the same HDMI port work flawlessly.
Thank you both for your help so far