You should convert the disk to NTFS from the command line using the Microsoft convert tool if you want an Ubuntu install greater than 4GB (open up a command prompt and type "convert /?" for more info) or install to another disk that uses NTFS instead.
If this isn't the problem with your install you can find out exactly what is by looking at the wubi installer log file in (Windows XP - YMMV) C:\Documents and Settings\[user name]\Local Settings\Temp. In this case the logs shows
ERROR Virtualdisk: Failed to extend file. Not enough free space?
ERROR Virtualdisk: WriteFile() failed!
which is the symptom, not the problem!