PKG is a file format used to store games and demos that you download over the PlayStation Store. This file format is also used to package user-created games, which you must install on your PS3 via a USB drive. If your PS3 cannot detect PKG files on your USB drive, you must convert the file format on the USB drive to FAT32. You can perform this task using the built-in disk management tools found in Windows 7.
Insert the USB drive into a USB slot on your Windows 7 PC.
Click “Start” and then click “Computer.”
Right-click the “Removable Disk” icon and select “Format.”
Click the button under “File System” and select “FAT32.”
Click the “Start” button. Your computer will now format the USB drive.
Get to the location of a PKG file on your computer. Next, right-click the PKG file, point to “Send To” and then select “Removable Disk.”
Remove the USB drive from your computer and insert it to your PS3.
Scroll over to the “Game” option on the XMB.
Select “Install Package Files” and press the “Circle” button to see the PKG file.
Formatting a USB drive will permanently remove all data on it.
A PS3 does not have the ability to read data off storage devices that use the NTFS file format.