Well if you have an arkanoid.ini that is setting the resolution, don't you think that is what is forcing the resolution?
duh!
Btw you typed 256x265 I don't know if that was a typo or not, but since 256xx265 is not a resolution listed by your card, that is why you are getting the odd-ball resolution.
Also about the directdraw surface.... pixel aspect is a non-issue, because unless Aaron typed the verbose output wierd, it says it created a 256x256 directdraw surface. Surfaces can't be stretched and in fullscreen mode the surface size would have to equal the resolution, unless some crazy manual blitting is going on. (Which is a possibility)
Dead space generally occurs on any directx app when the resolution selected isn't supported but the code has error suppression. What happens is a larger resolution is actually used and since the surface size can't be stretched, it simply fills as much of the screen as possible, leaving dead space below and to the right. This is what you are describing yes?
So remove the ini and see what res it selects now.