LAN and Internet Speed Linked?

Hi,

I'm new to this forum, so please bear with me.

Here's what I have.....

I have a hard drive connected to my WAG320N router. When I transfer data to it (wirelessly), on its own having no internet activity and 1 pc connected, all is gravy.

But now here's where my understanding goes. When I start to download on the pc and transferring data to the networked Hard drive, the transfer rate slows to "HALF" (exactly!) of my internet bandwidth. (I have a 4mb line, so transfer is approx 500kb/sec.)

This leaves me with my data transfer on my LAN now only transferring at 250kb/sec, and my download oddly restricted to only 250kb/sec.

Btw this is happening all over WIRELESS.

If I was to stop the LAN transfer the internet download would increase to 500kb/sec every single time without fail! and Vice Versa

I am on talk talk and had the SAME snag with their "default" router, so I assumed it was a duff router they had sent me.

So this is where I stand. From my understanding LAN's and WAN's should be totally separate. Why does downloading affect my LAN transfer?
Do I need to change some router settings?

My setup: Router WAG320N with 500gb Usb HD (Iomega) attached.
Ps3 attached via gigabit line
3 x Pc's/Laptops wireless and Iphone's

MY Rig : Q6660, Ati 1gb 4870, 500gb WD HD, Windows 7 (64bit)
If anyone needs more info let me know and I'll gladdly oblige.

Please help.