This morning, when I checked the available updates in the update
manager, I found a new kernel waiting to be installed. I upgraded to
this kernel (version 3.0.0-17.30)  and successfully booted into it with
no problems.

william@ishtar:~$ uname -a
Linux ishtar 3.0.0-17-generic #30-Ubuntu SMP Thu Mar 8 17:34:21 UTC 2012 i686 
i686 i386 GNU/Linux

After I booted into this kernel, I found that I was able to make big
disk image files with both the qemu-img command and through the
VirtualBox GUI. I was also able to interrupt the file creation process
with ctl-c in the command window, or by pressing the cancel button in
VirtualBox.

This issue seems to be fixed with this new kernel.

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https://bugs.launchpad.net/bugs/952489

Title:
  process creating gigabyte files on encrypted filesystem fails with
  100%  cpu

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