Thanks, I read through that and setup multi-site as specified. WordPress is working fine, it’s just the user blog creation that has the issue. Everything else, including the forums is good. I verified that domain aliasing ( *.domain.com ) is not setup in the httpd_conf, so it’s definitely the problem of the hosting.
Could this have something to do with domain aliasing being disabled on the server? I’m with Dreamhost and I think they has that feature turned off. In that case, it would never work with subdomains.