Finally it's worked!
I had to move PS3 to other tv with component inputs. Looks like by default PS3 decided to use 720p instead of 1080i.

So here are the steps for connecting PS3 to BS1

1. Connect PS3 using provided composite cable (resolution 480p) use VCR input for example.
2. Go to external sources menu of BS1 --> VCR and set input to GENERIC NTSC and hit GO
3. Set external sources menu of BS1 --> DVD to GENERIC YPbPr and hit GO
4. Toggle between BS1 inputs and you should see PS3 menu when VCR is selected on BS1.
5. Using PS3 controller go to screen setting and select Component cable. then manually set resolution to 480p and 1080i (uncheck 720p!)
Do not press X which will apply changes!
6. remove composite cable from PS3 and replace it with component which should be connected to component input on BS1 (top panel)
7. Press DVD on BS1 - you shoulg get black screen.
8. Now press X on PS3.
note you have 30 secods to confirm PS3 screen resolution settings otherwise PS 3 will switch back to previos settings.