Is this Hard Drive brand new? Did you format the HDD to fat 32 first before putting it in the PS3( we always to do that before putting it in) also you are trying to reinstall the system software from a Thumb drive I'm assuming... did you make sure that Thumb Drive is formatted to fat 32 as well?
I'm not sure how to format a 2.5" hard drive without some special cable, the flash drive was formatted to fat32 and the only thing on it were two folders (PS3>UPDATE, then the file inside it).
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