I had this problem a while ago and I almost corrupted my computer trying to delete the folder manually. The correct way to delete the folder is using Disk Clean-up. The instructions are as follows:
Open Computer (aka My Computer).
Right click 'Local Disk' and click 'Properties.'
Click 'Disk Clean-up' (approximately halfway down on the right).
Wait for Disk Clean-up to load (this could take a while).
Click 'Clean up system files' (bottom left).
Wait for Disk Clean-up to load again.
From the list of items you can delete, select 'Previous Windows Installation.'
Whilst you are at it, select any other system files you wish to delete, such as temporary files (all of the files listed by Disk Clean-up can be deleted safely, although unless you want to run a full back-up of your files immediately after using Disk Clean-up, take care not to select anything that is clearly labelled as 'backup' or 'file history').
Click 'OK.'
Click 'Delete Files.'
Wait for the files to be deleted.
Restart your computer.
Done.
If the above process doesn't work your Operating System is likely to be corrupted in some way and the 'easiest' way to fix it would be to do a clean installation of Windows 7 (or Windows XP / Vista followed by the Windows 7 upgrade).
