As it happens, I was just debugging this problem now. My hunch is that it is related to the fact that we just got ourselves a new computer running a more recent version of Matlab (2013a). We are using pickatlas version 3.0.3. Previously, we had been running 2010b, also with pickatlas version 3.0.3, and it works (pretty much) just fine. I just verified the process on our old computer (running matlab 2010b), and successfully saved a .nii file. However, I did note that doing so generates a warning: 

Warning: The fourth output, VERSN, of FILEPARTS will be removed in a future release.
> In fileparts at 35
In wfu_pickatlas>SaveMask at 2178
In wfu_piackatlas>cmdSaveMask_callback at 954
In wfu_pickatlas at 110

So the fix is to remove the versn output from fileparts by changing line 2178 to read:
[pathstr, name, ext] = fileparts(outfilename)

The change to FILEPARTS has wrecked many SPM toolboxes for us, so be on the lookout for this problem using other SPM plugins (e.g., marsbar) when upgrading to a newer version of MATLAB. I'd also suggest doing a grep for FILEPARTS in other pickatlas scripts.

Cheers,
Chris