Ruby - 79 77 75 83 chars
n,d=ARGV
l=n.to_s.length
printf"%.#{l>3?d:0}f%s",n.to_f/10**(l-l%3)," kMGTPE"[l/3]
Reads from command line arguments.
74 72 80 chars, prints output within double quotes
n,d=ARGV
l=n.to_s.length
p"%.#{l>3?d:0}f%s"%[n.to_f/10**(l-l%3)," kMGTPE"[l/3]]
66 74 chars, prints extra zeroes
n,d=ARGV
l=n.to_s.length
p"%.#{d}f%s"%[n.to_f/10**(l-l%3)," kMGTPE"[l/3]]
Based on this solution, and the sample code.
