According to the KVM FAQ while it is possible to run 32-bit guests on top of a 64-bit host, "the only unsupported combination is a 64-bit guest on a 32-bit host". So virtualisation will probably not help you in this case.
The PAE extensions really only help if you are running many processes, each of which need less than 4GB of address space. While the extension allows the operating system to manage more memory, it is still limited by the 32-bit address space.
If you have a single memory hungry process you really need a larger address space, which you get through a 64-bit kernel.