Did you click on either the "Bookmarks Toolbar" or "Bookmarks"? If you did, the New Folder choice should be active.

I click on bookmarks then organize bookmarks then organize. The menu that drops down has everything dimmed except copy, select all and close

So you didn't see the Bookmarks Toolbar and/or Bookmarks folders? Were there any bookmark folders in the window at all?

Just the default, most visited and recent. I have also tried using the toolbar with same result.

Please read this article to see if it helps. If it still doesn't, you can try this alternate method to see if that works:

To create a new folder, simply find that one bookmark, in the bookmarks list, and right-click it. A window will open, titled "ADD FOLDER". In the "name:" window, simply type in the name you wish to name this folder. Your newly-named, new folder, inclusive of your new bookmark, will then appear in the bookmarks menu list [edit start], which is called the Unsorted Bookmarks Folder, vertically next to each other. Just drag and drop the bookmarked url into the new folder. If you are asking whether a bookmark and newly-named folder can be created at the very same time, these are two separate functions. Because Firefox cannot know in advance what you might want to newly-name a new folder, Firefox places your new bookmark in your Unsorted Bookmarks folder.

Sorry, forgot to include the link:

http://kb.mozillazine.org/Lost_bookmarks#Restoring_bookmarks_in_Firefox_3_and_above