Server from Hetzner has fallowing configuration:

Main IP: 188.40.22.8
NetMask: 255.255.255.192
3 IP assinged to the server: 188.40.22.9, 188.40.22.10, 188.40.22.11

1. Enable rescue mode:
rescue-mode-64Bit
2. Reset server
rescue-mode-reboot
3. Save Password and wait around 2 minutes.
4. Now log in to server via ssh.
rescue-mode-64Bit-loggin-to-server
5. Execute installimage to start installation.
rescue-mode-64Bit-installimage-1
6. Select Debain 5.0 as operating system
select-operating-system
7. Now you should have Debian 5.0 Lenny installed.
rescue-mode-64Bit-finish

8. Reboot server

root@rescue ~ # reboot

9. Install Xen

apt-get install xen-hypervisor-3.2-1-amd64 xen-linux-system-2.6.26-2-xen-amd64 xen-utils-3.2-1 xenstore-utils xenwatch xen-shell xen-tools

10. Reboot server

# reboot

11. Yes we have xen installed

# uname -a
Linux Debian-50-lenny-64-minimal 2.6.26-2-xen-amd64 #1 SMP Thu Nov 5 04:27:12 UTC 2009 x86_64 GNU/Linux

12. Enable Xen routed networking

# nano /etc/xen/xend-config.sxp

comment out:

#(network-script network-bridge)
#(network-script network-dummy)
#(vif-script vif-bridge)

and add fallowing lines:

(network-script 'network-route netdev=eth0')
(vif-script vif-route)

Save file and restart xend:

# /etc/init.d/xend restart

13. /etc/sysctl.conf should match this results.

# cat /etc/sysctl.conf
### Hetzner Online AG installimage
# sysctl config
net.ipv4.ip_forward=1
net.ipv4.conf.all.rp_filter=1
net.ipv4.icmp_echo_ignore_broadcasts=1

Apply new changed by executing command:

# sysctl -p
net.ipv4.ip_forward = 1
net.ipv4.conf.all.rp_filter = 1
net.ipv4.icmp_echo_ignore_broadcasts = 1

14. We are not using LVM just simple image based VM with ext3. So we need increase loop.

# nano /etc/modules
# /etc/modules: kernel modules to load at boot time.
#
# This file contains the names of kernel modules that should be loaded
# at boot time, one per line. Lines beginning with "#" are ignored.
# Parameters can be specified after the module name.

loop max_loop=64

15. Great! We have everything ready to run first VPS. We will use xen-tools to create first VPS.
For new VM instance we need IP, NetMask and Gateway.

IP: 188.40.22.9
NetMask: 255.255.255.192
Gateway: 188.40.22.8

Please note Gateway for all VPSes is main IP assigned from Hetzner. In this case 188.40.22.8.

# xen-create-image --hostname=test --size=3Gb --swap=256Mb --ide --ip=188.40.22.9 --netmask=255.255.255.192 --gateway=188.40.22.8 --dir=/xen --memory=512M --kernel=/boot/vmlinuz-2.6.26-2-xen-amd64 --initrd=/boot/initrd.img-2.6.26-2-xen-amd64 --debootstrap --dist=lenny --mirror=http://ftp2.de.debian.org/debian/ --passwd
General Information
--------------------
Hostname       :  test
Distribution   :  lenny
Partitions     :  swap            256Mb (swap)
                  /               3Gb   (ext3)
Image type     :  sparse
Memory size    :  512M
Kernel path    :  /boot/vmlinuz-2.6.26-2-xen-amd64
Initrd path    :  /boot/initrd.img-2.6.26-2-xen-amd64

Networking Information
----------------------
IP Address 1   : 188.40.22.9 [MAC: 00:16:3E:79:13:F3]
Netmask        : 255.255.255.192
Gateway        : 188.40.22.8

Creating partition image: /xen/domains/test/swap.img
Done

Creating swap on /xen/domains/test/swap.img
Done

Creating partition image: /xen/domains/test/disk.img
Done

Creating ext3 filesystem on /xen/domains/test/disk.img
Done
Installation method: debootstrap
Done

Running hooks
Done

No role scripts were specified.  Skipping

Creating Xen configuration file
Done
Setting up root password
Enter new UNIX password:
Retype new UNIX password:
passwd: password updated successfully
All done

Logfile produced at:
         /var/log/xen-tools/test.log

16. Edit VM’s configuration and addional line

extra = 'console=hvc0 xencons=tty'
# nano /etc/xen/test.cfg
#
# Configuration file for the Xen instance test, created
# by xen-tools 3.9 on Sat Jan  9 18:31:35 2010.
#

#
#  Kernel + memory size
#
kernel      = '/boot/vmlinuz-2.6.26-2-xen-amd64'
ramdisk     = '/boot/initrd.img-2.6.26-2-xen-amd64'
memory      = '512'

#
#  Disk device(s).
#
root        = '/dev/hda2 ro'
disk        = [
                  'file:/xen/domains/test/swap.img,hda1,w',
                  'file:/xen/domains/test/disk.img,hda2,w',
              ]

#
#  Hostname
#
name        = 'test'

#
#  Networking
#
vif         = [ 'ip=188.40.22.8,mac=00:16:3E:79:13:F3' ]

#
#  Behaviour
#
on_poweroff = 'destroy'
on_reboot   = 'restart'
on_crash    = 'restart'

extra = 'console=hvc0 xencons=tty'

17. Start new VM

# xm create /etc/xen/test.cfg
Using config file "/etc/xen/test.cfg".
Started domain test

Error:

/etc/init.d/xend restart
Restarting XEN control daemon: xend/etc/xen/scripts/network-route: line 27: /proc/sys/net/ipv4/conf/eth/proxy_arp: No such file or directory
/etc/xen/scripts/network-route: line 27: /proc/sys/net/ipv4/conf/eth/proxy_arp: No such file or directory
/etc/xen/scripts/network-route: line 27: /proc/sys/net/ipv4/conf/eth/proxy_arp: No such file or directory
/etc/xen/scripts/network-route: line 27: /proc/sys/net/ipv4/conf/eth/proxy_arp: No such file or directory
/etc/xen/scripts/network-route: line 27: /proc/sys/net/ipv4/conf/eth/proxy_arp: No such file or directory

Solution
This solution pertain to Xen 3.2.x

With new version of Xen you need specify the network device (netdev) in configuration file (/etc/xen/xend-config.sxp)

(network-script 'network-route netdev=eth0')
(vif-script vif-route)
Error:

Server refused to allocate pty
stdin: is not a tty

Solution

xm create /etx/xen/test.cfg
xm console test
apt-get install udev

Additonaly you can add line to /etc/fstab in DomU

none /dev/pts devpts gid=5,mode=620 0 0

Don’t forget to restart DomU.

reboot