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Your PHP Memory is set to 40M and your using GD2 which uses PHP memory. When the zipfile is uncompressed your definately going to have lots and lots of images uncompressed which is going to trigger a memory issue.
My suggestion would be to limit filesize uploads to a certain size that is going to work well for your site. Try an 8mb upload and see of that zip uncompresses correctly. It's not so much the uploadsize here but when it is unzipped it grows extremely in size. I know most images are compressed tons in a zipfile so I don't even wanna thing of how big the uncompressed files are.
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