For solving an error about SSL connection timing out on read operation when installing from disk, direct write from source image to VM image was added in hosted-engine setup (Bug #1034777). At the same time a RFE for adding file:// protocol support to downloadImage verb was filled (Bug #1037500) and should be now available in VDSM. We should rebase the code for using the new feature.
Looks like qemu-img conversion of the source image is still needed when using block storage since it doesn't support sparse images, so closing this as won't fix.