Putting '&fmt=18' at the end of the url and downloading the streaming file using Orbit Downloader, I got a .mov file. But regardless, here's what I did.
I opened up Total Video Converter 3.10 (you can find this on any torrent site), and dragged the youtube video file into it, it asked me what filetype I wanted to convert it to, and I chose "FLV", luckily for me the resolution for the .mov was 480x277 which is close enough to the PSP's native resolution so I didn't have to mess with settings. After the conversion, I dragged the FLV to my 'favorites' folder in PSPtube and tested it out, and it worked.
If you already know how to convert videos to FLV, just make sure to change the resolution of the video to something closer to the PSP's resolution (480x272, 320x240).
Also, don't know what version of PSPtube you're using but there's Super PSPtube 2.0 that can play WMV, AVI, MP4, MP3 and a few other formats without needing you to convert. I haven't tested it out with many formats yet but it seems to be okay.
Here's the link for Super Psptube 2.0
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What method are you using to download the videos?