Unfortunately, the only thing you can retexture on Mario is his hat, buttons and face, since his clothes are composed of flat/solid colors (in other words, no textures).EDIT: Mario himself might need to rework as well. Maybe make him look like Wii's mario version.
It looks like the texture is not being dumped or the size is incorrect. I think this game only accepts textures 3X bigger than the original ones. If you get past the maximum size it won't have any effect. Maybe I should try with 128x128 and see what happens.why cant you?