You can't use such a grouping as is, create a grouping variable...
edges=[0.5 1.5:0.5:3.5 inf];
g=discretize(Z);
hSC=scatter(X,Y,[],g);
I illustrated the idea of a legend correlated with color just yesterday -- the legend is associated with an object handle, not a property, so you'll have to supply a color for each bin -- the <example> used a fixed color for each scatter object instead so it needed the RGB triplet form instead of being able to use the indexing into a colormap, but the code logic is the same idea as there.
