This is a puzzle.  I have tried many different settings, sizes, positions, projections,  for the texture you used and cannot make it smooth with the bump settings you show.  
If you click the 'diffuse' button, do you get the color map?  The sphere should turn the colors shown in the first texture box.      
Do you get this bump problem with every bumpy  texture?  Have you tried choosing one of the rock textures?  All of them have bump maps.  
When you try a new texture do you try it on a new primative?  You should try each one on a new primative so all of the settings are fresh.

If you can't do bumps on other textures.  Let us know.  If it is just this one then I can email a new copy of it to you.