I think the reason is because you are generally not allowed to create sub-sub domains and because subdomain.dreamhosters.com is already a subdomain the system just blocks the creation of sub-sub domains. I’m getting the idea that they are doing this to prevent people from creating too many subdomains instead of using sub-folders. Each subdomain has to have a configuration entry in the webserver. Too many subdomains would increase the size of the server configuration dramatically.
This would also explain why you can still create sub-sub Domains on a DNS level since it only affects the DNS server and not the webserver configuration.
Still, I agree, they should make an exception when it comes to the creating of sub-sub domains on a dreamhosters.com level.
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