How can you set up a password protected folder in OSX 10.8.2

I'm trying to set up password protected folder on a new mac desktop. Version 10.8.2
I have done this before in Mountain Lion and previous OS versions by creating a "Disk Image" in the disk utitlity. It's been easy. But in this newer version, it doesn't give me the same options that I've seen in the past nor see on many online posts. And when I try to create, it just gives me an error message saying there is not enough space, which is crazy as there is over 500GB open.
Any ideas?
Thanks

It still works in Disk Utility (DU):
1. Determine one file that shall be inside the DMG, e.g. one on the Desktop (obviously, you can delete it later again). say it's xyz.jpg.
2. In DU, without a drive selected, click New Image.
3. Expand to Finder-like view by clicking on the arrow next to Save As.
4. Click on xyz.jpg, even if greyed out. It will show up under Save As with the .dmg suffix.
5. In the bottom part, select Name, Size, and all other parameters. You want encryption, so pick one, then click Create.
6. Next, enter and remember your password. Probably you will NOT want it to be remembered in Keychain...
7. That's it: at the same location as xyz.jpg you now have xyz.dmg. In the Finder it's open, and you can manage its content until you eject it.

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