Did you remove the DNS record that you manually added for your sub-domain before attempting to add it via the Add Domain / Sub-Domain method?
The bad_httpd_conf error can sometimes be rectified by going back into Manage Domains, clicking Edit on the relevant domain then clicking Change Fully Hosted Settings Now!, without actually making any changes. This causes the Apache conf file to be rebuilt.
You just need to make sure that the correct option is selected in the How do you like the www in your URL? section when creating your sub-domain.
Also, I should point out that it will take some time before your sub-domains DNS information has propagated across the Internet and is fully usable.
Save [color=#CC0000]$50[/color] on DreamHost hosting using promo code [color=#CC0000]SAVEMONEY[/color] ( Click for promo code details )