Conclusions:
- The VM DOES NOT BOOT the image is not corrupt as the cloud image neither 
boots.
- Other vms on that problematic machine running fine so the kvm-qemu and 
libvirt should be fine as well.
- There is still enough memory on that machine. (screenshot in prev post)
- By comparing sha1sums of update packages all seems to be equal on both 
machines.
- I have tried VM with 256MB, 512MB RAM which should be enough to boot the 
kernel
- there is nothing strange in libvirt logs (posted above) 

I guess It could be related to kernel, processor architecture or LVM as it 
hangs at boot
Not sure how to get some stacktrace what is happening at boot of the VM.

ARCHITECTURE DIFFERENCE:
Server 1 (problematic): Processor Intel Xeon
Server2 : Processor AMD Opteron

There was a bug for select models of Intel cpus before:
http://www.mail-archive.com/kvm@vger.kernel.org/msg39396.html

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https://bugs.launchpad.net/bugs/1029889

Title:
  LVM Based KVM VM taking 100% CPU on first start and hangs.

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