Can't create database in SQL Server Express 2005
I don't really think the problem is creating the database with model as active database as Reaces mentioned in this answer.

It is possible to create a new database using 

USE Model
GO
CREATE DATABASE TEST;
GO


The issue might be some process or session holding lock on the model database and the CREATE Database statement not able to acquire the exclusive lock required.

Check what processes are currently using the model database, you can use

SELECT  *
FROM    sys.sysprocesses
WHERE   DB_NAME(dbid) = 'model'


Depending on what sessions are running, you can probably issue a KILL &lt;SPID&gt;, where &lt;SPID&gt; is the session_id of the session holding a lock on model, and try creating the database again.

Update: Here is a query to find what sessions are currently running, the locks requested and additional information: (Run on model database)

SELECT  resource_type ,
    request_session_id ,
    t.TEXT AS Command,
    request_mode ,
    request_type, request_status,
    s.program_name, s.status
FROM    sys.dm_tran_locks l JOIN sys.dm_exec_sessions s 
ON l.request_session_id = s.session_id
    JOIN sys.dm_exec_requests r ON r.session_id = l.request_session_id
    CROSS APPLY sys.dm_exec_sql_text(r.sql_handle) t
WHERE   resource_database_id = DB_ID()