Of course it won't show up in df after losetup, since df shows only mounted filesystems. Remove the loopback you've just created, unmount /FAW/xen_vm, then set up the loopback device again and run pvcreate on it. After this it will still not show up in df, but you can create a volume group and logical volumes on it, which you can then put a filesystem on.
2)Create a loopback device for the file
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#losetup -f /FAW/vms/linux_vm/disk2.img
# losetup -a
/dev/loop0: [fd01]:49160 (/FAW/vms/linux_vm/disk2.img)
3) Run pvcreate on the loopback device
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# pvcreate /dev/loop0 (initialise disk created)
Physical volume "/dev/loop0" successfully created
4)Run vgcreate on the "physical" volume
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#vgcreate xen-vm /dev/loop0
Volume group "xen-vm" successfully created
5) Run lvcreate on the volume group
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#lvcreate -L450G -nxen_prov xen-vm
Logical volume "xen_prov" created
6)Create a filesystem on the logical volume
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#mkfs.ext3 /dev/xen-vm/xen_prov
mke2fs 1.39 (29-May-2006)
Filesystem label=
OS type: Linux
Block size=4096 (log=2)
Fragment size=4096 (log=2)
58982400 inodes, 117964800 blocks
5898240 blocks (5.00%) reserved for the super user
First data block=0
......................
.........................................
7) Mount the logical volume
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mount /dev/xen-vm/xen_prov /FAW/xen_vm
Let us know if this is rite, I have not yet executed the 7th point since I have not go the system back yet.
Step 7 as you've written it is not correct. You have to mount the logical volume, not the image file!
mount /dev/xen-vm/xen_prov /FMW/xen_vm
And I hope that this is only for experimenting with LVM, since a loopback device will not be re-created automatically after a reboot, and thus can't be automatically be mounted during startup. This is why I suggested that you use the whole of sdb1 if possible.
Lets take a step back here and look at the complete picture. You have a 1TB drive/partition, on which you should create a 500G filesystem for use with Xen. What about the rest of the drive? Is this reserved for a different project? If so, could that project also use LVM? If not, would it be possible to re-partition the drive?