File Creation in PHP

While I am able to read & write afresh to an existing file in the harddisk
in a web directory, I am unable to decypher, why I am NOT able to Create
a new File with fopen("xyz.txt",'w').

The error message I get is
Warning: fopen(./images/Inside City/WaterFront/P1130106.txt) [function.fopen]: failed to open stream: Permission denied ...

While I understand, this has to do with permissions, can anyone suggest,
why I get this error, inspite of the fact, that when a file is existing,
the fopen opens the file, and fwrite deletes and rewrites into it successfully.
But when I want to CREATE a file, I get the above error. I have
given public permission to images folder.

Any help would be appreciated.