Setup was unable to create a new partition or locate an existing system partition ... setup log ... while installing windows 7 ...
Well, it appears that the windows installer is crazy.
The following procedure worked for me and I was able to install Windows from a USB drive.
Fireup a Command Prompt during the installation
( Repair Your Computer -> Command Prompt -> ... )
Enter diskpart and list your disk(s)
X:\windows\sources>diskpart DISKPART>list diskFigure out the drive you want Windows installed eg: 0
now clean the disk you are about to install windows ( eg: disk 0 )
DISKPART>select disk 0 DISKPART>clean DISKPART>exit X:\windows\sources>exit
select "Install now"
Insert any other USB drive on a USB port and pretend you want to load a driver for the HD ( "Load Driver" )
Make sure you see the new USB drive
That's it, now take off the dummy USB drive
hit the "x" button to close the window,
then hit the "Install Now" button and start the installation process again.
When you arrive at "Where do you want to install Windows?", select the unallocated space and hit "Next" ( let the windows installer to setup the partitions for you )
Windows 7 installation: Setup was unable to create a new partition or locate an existing system partition ....