Installation impossible when partition mounted on HD

Binary package hint: live-installer

When having only access to a laptop and internet it becomes impossible to install Ubuntu to a separate partition, for no valid reason. The installer complains and halts/loops at 15% due to a partition being mounted on the HD claiming it thus cant continue because "it has to do changes on the HD" even when no such change is needed.

According to live-installer itself after manual partition setup it claims it wont need to alter structure.
I have even tried to prevent it from installing grub (clicking [Advanced] button and deselecting grub installation to HD), but it still fails.

Usage case:

Available - Laptop with windows, 1 internal HD, Internet
Not available - CD-ROM drive, No large enough USB memory

Steps to reproduce:

1) From Windows Install (a temporary) Ubuntu via WUBI
2) Start temp Ubuntu located on windows
3) Install gparted and make room on HD for a proper Ubuntu install (eg making 5GiB hd5 and 100GiB hd6 with ext3)
4) Download and place eg ubuntu-9.10-desktop-i386.iso on /dev/sda5
5) Add live-cd image to grub2 menu (sudo gedit /etc/grub.d/40_custom)

menuentry "Ubuntu Desktop LiveCD (i386)" {
 set root=(hd0,5)
 loopback loop /isos/ubuntu-9.10-desktop-i386.iso
 linux (loop)/casper/vmlinuz boot=casper iso-scan/filename=/isos/ubuntu-9.10-desktop-i386.iso --
 initrd (loop)/casper/initrd.lz
}

6) sudo update-grub
7) Reboot and start live cd from HD
8) Start installation procedure
9) At HD setup choose manual and specify hd6 to be / with no formating
10) Deselect any preselected swapspace (to avoid formating)
11) See Ubuntu verify no changes to HD needed
12) Additionally deselect installation of Grub to HD in any form

13) Watch in frustration as installation fails and return to HD setup when reaching 15% due to "cant make needed changes to sda" since you have a loopback mounted on sda5 even though clearly no changes need to be made to neither MBR or sda5 (or any other partition for that matter).

BTW There is a popup box that comes up with 2 alternatives with the fail message, both of which do nothing except take you back to HD setup... If the alternatives perform the same thing, just add 1 [OK] button, not 2 different. Not good UI to create the perception of choise when no choise exists.