Windows 7 may fail to install, giving the error message “Setup was unable to create a new system partition or locate an existing system partition. See the Setup log files for more information.” Generally this error occurs in situations in which multiple disks are connected to the system.
In order to eliminate this issue, disconnect any disks that are formatted as “dynamic disks.” Dynamic disk volumes cannot be changed back to partitions, causing the Windows 7 installation process to fail. Simply disconnect any external or internal hard disks that are formatted as dynamic disks then re-attempt installation.
Alternatively, you can convert the dynamic disk back to a basic disk using this process.