This question is a really common one and there are SEVERAL Avsforum threads on it, but basically it has to do with the color space. HD video is going to conform to REC709 color gamut which effectively sets the black point at a value of 16 and the white point at 235. PS calls this RGB Limited.
Your video game console though being more like a desktop computer can actually display the full RGB color gamut which sets black at 0 and white at 255 which is why the image appears more contrasty because (assuming your TV can do a full range RGB -- which most LCDs can) there is more information between the deepest blacks and whitest whites. The color gamut for RGB full shown here http://en.wikipedia.org/wiki/File:CIE1931xy_CIERGB.svg
. The corners of the triangle are the primary colors, E is the white point.
For blu-ray use however this isn't the case. Rec709 is the HD video standard. 16 - 235 is all you're going to get regardless of what you try to set the PS to. If it seems that there is more contrast on a blu-ray, it's artificial as you are not actually resolving more detail, effectively meaning you're not going to see more information in the shadows or highlights of the image. Similar to what the 'dynamic picture mode' setting does on flat screen TVs. Artificially boosts contrast. Compare the above chart with a REC709 chart and notice the differences in how much color gets resolved and where the primaries land. http://en.wikipedia.org/wiki/File:CIExy1931_sRGB.svg
So for gaming you can leave it in FULL mode and it won't really matter for Blu-Ray use, being that Blu-Ray is always going to be less than full RGB. Obviously it also depends on whether or not the content of the game on the PS3 can accommodate full RGB as well, the game itself might be Rec709 standards, meaning the only rich contrast and saturation will be the menus on the PS3.