After trying everything else, it seems that VMArguments just don't work in eclipse.
Changing VM's default DEFAULT arguments in eclipse (finally!):
Inserting virtual machine arguments in the JRE: while Eclipse is open, open Preferences (for Windows: located under the Window menu item. For Mac: located under the Eclipse menu item), open the Java section, click "Installed JREs", click the used JRE ( there will probably be jre6), click the "Change ..." button and paste this into the default VM arguments:
-Xms256M -Xmx8192M
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