This is a completely different problem than in RHEL 6. What happens is that qemu-img completely ignores the request to create a 128 MB image and just makes sn1.qcow2 the same size as base.qcow2 (i.e. 64 MB). The read fails because part of it is after the end of the image.
Kevin, What is the proposed solution for RHEL5, then ?
Not worth fixing/backporting the feature. You can't create backing files that are smaller than the disk in RHEL 5 and it looks as if nobody has ever tried in practice.