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The tool doesn't like some USB drives (especially large hard drives inside enclosures).
Just create it manually with diskpart and 7-zip (from a Windows 7 64-bit or 32-bit system of course).
Notes from above link in-case it goes dead:
Open an admin cmd prompt (Start, cmd, ctrl+shift+enter) diskpart list disk select disk # clean create partition primary select partition 1 active format quick fs=fat32 assign exit Extract the Windows 7 ISO to the root of the drive.
If you want NTFS instead of FAT32 you also need to do "Bootsect.exe /nt60 X:" which you will find the bootsect.exe on the extracted drive in \boot\bootsect.exe
This does erase everything on the USB drive. Be careful.