Anaconda does not allow installations into a logical volume. However, Xen's backend block drivers allow to have roots on LVs of LVM2. It would be great if such a configuration was possible to install. Best of all, while running under Xen. The issue is, if I select a volume, Anaconda says: "bootable partitions cannot be at a logical volume" But in this case, I don't even need to install grub. Current workaround is to keep a spare partition, install there, then copy the installation over into the desirable Xen guest's root image.
Your guest will be using pygrub, though, and pygrub doesn't know how to boot an LV either.