This phone downloads apps to phone memory by default, however there is an option to change that.
Try to move some of your installed apps to sd card to create more free space, please note that some apps will not move to sd card
To move apps to sd card, Go to settings=> applications/apps=> manage applications then tap the app you want to move and touch "move to sd card"
Note: applications installed on sd card will no work if sd card is removed.