Обновите WinAVR. У вас старенькая версия, в ней действительно таковое ограничение есть. В более новых:
Цитата
The maximal possible delay is 262.14 ms / F_CPU in MHz.
When the user request delay which exceed the maximum possible one,
_delay_ms() provides a decreased resolution functionality. In this
mode _delay_ms() will work with a resolution of 1/10 ms, providing
delays up to 6.5535 seconds (independent from CPU frequency). The
user will not be informed about decreased resolution.
Либо циклом, типа for(...) _delay_ms(0.96).