I can confirm this is still a problem with the LiveCD 7.10 beta.
One minor point to add - I was seeing another dialog box, with a cancel button, underneath the error dialog box.
But the user can not get to it. It is greyed out and the button is inactive.
While admittedly I don't do UI programming, this seems like a simple bug to kill - don't have the error dialog box block user access to the other dialog box's button so they can cancel the whole operation. You can still require them to handle the error box response too, if it is too much of a pain to cancel it automatically.