I've never had much luck with the standard Eclipse AVD, usually run into nuisances and errors in it. I'm not trying to advertise here or anything but a free program, Genymotion has worked for me. It runs like any other virtual device, once you have the device running you can run your app on it from eclipse too. Has all the options that the normal virtual devices has.
As for your issue, this stack overflow should help.
Key info of linked URL:
Go to the following directory in your computer:
C:\Users.android\avd
Inside this directory you will find all files and directories with the
definition and content of your avd machines-
Now do the basic troubleshooting steps:
-check if the avd directory exists and if it contains a file with the name "sdcard.img".
-if the file exists, try to rename it (to check if its locked) and then go to eclipse and ask to create a new sd card.
-if it fails, try to create manualy a file with that name to check premissions.
Comments:
So your problem in not creating the sdcard, but creating the avd.
Correct? Do you have any spaces in the name of the directory where the
SDK is installed or in windows user directory?
You could also manually create an SD card through the mksdcard command