They are to do with support for legacy RGB DVI displays which support only 0-255 RGB levels and not the broadcast/studio standard of 16-235 RGB levels which almost all HDMI displays should support, and is the levels standard used for DVDs and BluRays.
Many displays will cope with either setting and deliver near identical results - though will need re-calibration depending on which one you chose. If you do not recalibrate, then FULL will appear to have deeper, crushed blacks and thus more saturated colours, and brighter whites. However with correct calibration on a studio level capable display there should be no difference. Additionally Limited levels will allow blacker-than-black and whiter-than-white to be passed through, whereas Full levels can't allow this as anything below 16 or above 235 in studio levels terms is mapped to 0 or 255 in Full (aka PC level terms)
In FULL mode the source - which is 16-235 - is remapped to 0-255 - so blacks which are encoded on the BluRay source at level 16, are not output at 16 and instead reduced to 0. Whites which are encoded on the BluRay source at level 235 are scaled to hit 255. Anything below 16 or above 235 (so called Blacker than Black and Whiter than White information) is clipped in FULL mode - it is NOT passed.
The key thing to understand is that broadcast TV, DVDs, HD-DVDs and BluRay are mastered with black at 16 and White at 235 (whether RGB or YCrCb representation are used - and Cr Cb are 16-240 centred around 127) These are known as studio or broadcast levels - and have a narrower black-to-white range to allow for below-black and above-white excursions to be carried without clipping - which is an important issue when you are mixing analogue and video sources (Transitions can cause spikes in analogue circuitry that will go past black and white levels, if these are clipped, they will cause ringing - i.e. artificial black/white edge distortion - when converted back to analogue.)
The fact that FULL and LIMITED are not simply different ways of displaying a signal with the same range - as you suggest - is clearly visible when you flip between modes - as in FULL mode the black level drops and white level increases. This is NOT what would happen if the switch was simply between passing <16 and >235 or not and keeping black at 16 and white at 235 - you would get no black or white level shift. But you do.
Super White is the option that allows whiter-than-white to be passed - not FULL.
FULL is simply an option Sony added to remap 16-235 studio levels to the older DVI RGB standard (previously uncatered for in PS3) using PC levels of 0-255. It is NOT to do with passing blacker than black or whiter than white - as it clips <16 and >235 levels in the remap process. This is important for projectors and owners of older HDTVs with DVI inputs added for use with PCs rather than video sources.
It is a pity Sony chose FULL and LIMITED as descriptions - as it implies FULL offers better results and LIMITED is somehow inferior. (I'd have thought STUDIO and COMPUTER levels might have been better)"
http://www.neowin.net/forum/topic/622671-rgb-fulllimited-discovering-truths-and-calibrating-your-tv/