If you're using loopback devices on your Xen host, then contrary to the documentation you must add the following to /etc/modprobe.d/loop:

options loop max_loop=255

This will mean when you run "modprobe loop" you'll see the following in the output of dmesg:

loop: loaded (max 255 devices)

Every single piece of documentation I've read suggests using the directory /etc/modutils but that just does not work.