cryptsetup on a loopback device with an offset fails

[Sam Lowry <lowry@altern.org>]

This is about a Lenny install with the stock kernel and modules.

I am doing an exercise of encrypting an existing debian partition
in a raw qemu image before doing that in production environment.

I first identified the start of the partition (98703360) by doing
  sfdisk -l -uS lenny.img

Then, I configured a loopback defice and mounted the partition

  losetup /dev/loop0 lenny.img
  mkdir lenny
  mount lenny.img lenny -t ext3 -o loop=/dev/loop0,offset=98703360

After backing up, I attempted to create an encrypted partition, but
cryptsetup failed with an obscure message:

  mkdir lenny-backup
  time cp -ax lenny/* lenny-backup/
  umount lenny
  cryptsetup luksFormat --offset=98703360 /dev/loop0
  >Command failed: Failed to write to key storage

AFAIU, all necessary modules were loaded.

  lsmod|egrep dm_crypt\|aes
  aes_i586                7744  0
  aes_generic            29256  1 aes_i586
  dm_crypt               11172  0
  dm_mod                 46184  1 dm_crypt
  crypto_blkcipher       15236  3 cbc,dm_crypt,ecb

Any idea on how create an encrypted partition in a loop-mounted disk image?