Just had a similar experience, but resolved it differently.
I created a "Lion" partition to install the new OS, leaving my old leopard partition in place. This made my partition list look like:
(Note -- even though the Lion partition looks like it is the last partition in the list, there is actually a hidden Apple Recovery partition, unmounted, as the last partition. You have to enable the disk utility debug menu to gain access to the hidden partition)
Lion installed fine, but I didn't have enough room for everything I wanted to move to the new OS, so I started tinkering with partition sizes.
While trying to resize/expand the partition for Lion, I removed the hidden disk recovery partition. This made the Lion partition the last partition in my disk partition list.
Trying to re-install Lion gave me the "this disk can't be used to start" message. On a hunch, I created a small partition from the bottom of my Lion partition, so that the Lion partition was (once again) NOT the last partition in the list.
This fixed the issue. The installer suddenly allowed me to install to the "Lion" partition.
To summarize, one of the situations which will prevent the installer from installing to a disk partition, is if it is the final partition in your partition list, including the hidden partitions.