The error is misleading. The system is trying to verify that file system permissions are correct so its trying to create that file to test it but the permissions are not correct so it can't.
You need to make sure the /Data folder (and all child objects) is writable by the web process. In IIS 7 I think you need to give write permission or full control on that folder to the NETWORK SERVICE user and possibly IUsr (which is not the same as IUsr_MachineName as in older versions of IIS).
Hope it helps,
Joe