Create a quick machine with a something.img file in the same location. Does it work or fail?
Are the permissions consistent from the one you just created to the one that you're attempting to get to work?
Are you using SELinux on the host operating system? Go to the .img file and perform a ls -lZ and examine the SELinux contexts. If you think these are out of order (and "getenforce" shows "Enforcing"), try restorecon against your image file (do you have a backup?).
You may have already seen the above link, there's something there on converting Xen to KVM.