I suspect your Hard Drive is connected SATA? Sounds like it, because of hte fact that XP doesnt detect it but Windows 7 does.
You either need to disable the SATA mode in the BIOS, or better yet, right when the setup process starts hit F6 so you can provide the setup program the correct SATA driver for your hard drive so it can detect it.
Not sure what hardware you have, but HP has a guide on this subject and it applies to this topic. The screenshots may be different, but the concept would be the same.