Now that Debian Installer supports Xen guests (many thanks to the d-i team for that) it was about time that virtinst/virt-manager could make use of it. Debian's virtinst package in experimental now supports this (the patch is also already included in upstream's mercurial repository). To install a paravirtialized guest on an existing block device use:
virt-install -n xenfoo1 -r 96 --disk path=/dev/blockdevice,device=disk --location=http://people.debian.org/~joeyh/d-i
To install into an image file you additionally have to specify the file size in GB:
virt-install -n xenfoo1 -r 96 --disk path=/path/to/file,device=disk,size=1 --location=http://people.debian.org/~joeyh/d-i
if you don't want to use a sparse file also add sparse=false. In all cases the disk will become /dev/xvda in the domU and the device will be partitioned during installation (so no need to pass in single partitions, booting will happen using pygrub).
--location above points to the Debian Installer daily builds since there hasn't been a d-i release with Xen support yet (this should happen really soon now). Once this has happened you can use any Debian mirror to install. (--location=http://ftp.nl.debian.org/debian/dists/testing/main/installer-i386).