The PSP has supported playlists since day 1. It's even mentioned in the manual (p. 69 of the original manual).
"If you want to specify the order of the tracks, create an m3u file specifying the order in the folder. The system will display the file as an (m3u) icon, and treat it as a group."
You can use .m3u playlists but it's probably just as easy to create music sub-folders and use those as playlists.
If you Google, you can find lots of programs you can use to generate the m3u files for you. One trick though, m3u files will not work in the music root folder. They only work for sub-music folders.
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