While Linux works fine as nested guests (L2), Windows of various versions do not - which is of course a serious downside of KVM's nested VMX. I verified this myself - seeing Windows 2000 hang on boot. It was also reported by others and is not specific to Windows 2000, e.g. the following reports by Gianluca Cecchi: http://lists.fedoraproject.org/pipermail/virt/2011-June/002702.html http://lists.fedoraproject.org/pipermail/virt/2011-November/002959.html http://comments.gmane.org/gmane.comp.emulators.kvm.devel/82131 At some point during our research prototype, Windows L2 guests *did* work (including Windows 2000), so it's probably not a big problem, but rather some sneaky bug.
Working on this bug while doing comparative analysis of Linux vs Windows as L2 guest I realized that by forcing addition of PAE & MCA flags in Xen configuration file I saw the boot animation which was previously not being displayed.