I'm using Creative Mediasource to record on a SB Audigy ZS Plat Pro, on 44000 khz, 16 bit .wav file. When I successfully record a section of music from a game I play it back and it sounds all sandy when the song's volume gets loud.

On closer inspection with Wavelab to check what went wrong I saw the higher amplitude sections "cut off", resulting in a scratchier sound. (an analogy would be the sound wave as grass, and the grass looks mowed, so the top edge is flat)

I've been recording a lot of music from a variety of sources, especially wave output from the sound card. This problem never occured before. When I set another output format, like mp3 at 192, stereo, the sound is fine.

What went wrong?

It seems like your input volume is too loud and those clipping sound occurs.
I would suggest you to use softwares that has a peak meter so you can adjust the signal to avoid clipping. hope this help.

That's exactly what is happening...magichand is correct. You must adjust your 'input' so that it does NOT exceed 0 dB...digital clipping is ugly...if you want to 'boost' the volume of the quieter parts after it is recorded then use a compressor and/or limiter.

I noticed digital clipping in the Led Zeppelin remastered version of Whole Lotta Love...the one on Best Of Early Days...very odd how they'd allow that to pass the final mastering.