There has to be some "unallocated space" showing for that physical drive in Disk Management in order to create a new volume there. If there is no "unallocated space" on the drive, you can't create a new volume.
Also, if the "unallocated space" is too small for the size of the volume you are trying to create, you will get the error message that appears in your post above.
In that case, you must delete an existing partition first, then you'll be able to create a new one.
If the existing partition is only visible in Disk Management, try adding a drive letter to it:
http://windows.microsoft.com/en-gb/windows/change-add-remove-drive-letter#1TC=windows-7