Comment 105 for bug 477169

There might be different issues intermingled here. Thanks to your comments I can confirm one bug:

If your windows boot device (say C:\) is different from the partition where you installed Wubi (say D:\ubuntu)
lupin>grub-mkimage will modify wubildr within the latter (D:\wubildr) instead of C:\wubildr. You can in such cases copy D:\wubildr to C:\ (replacing drive letters as appropriate). I am not sure though that is going to help much.

There also seems to be an issue with grub being unable to read a file within a large loopfile, particularly when the contained files are overwritten, so possibly an issue with the ntfs/loop modules within grub. I cannot reproduce this, could it be linked to fragmentation / file size of root.disk / file system size? Is there a size over which this always happens? Does any file that is overwritten within root.disk become unaccessible to grub?