That's the problem... you are not supposed to delete/recreate the partition. You have to reformat the existing partition, even if you have to do that ahead of the install by way of booting the install DVD to use the tools available to do so before starting the actual install bootstrap.
The System Profiler report shows it still as "File System: MS-DOS" and it need to be "File System: NTFS" or it will not be processed properly by VMware Fusion.