This time you can just format the D: drive, no need to delete the partition and create a new one, though you can do that if you prefer.
500MB free on C: is going to be a problem I suspect and may be the cause of the hang. Even though you are installing to D: the install process is most likely writing some stuff to C: and is definitely updating the boot.ini on the C: drive.
Might be a good idea to offload some stuff from C: to CD/DVD to give yourself at least a gig of free space there. I may be wrong on this but it's something to think about.