Problem solved!
Here's what I did. I booted from an Apple Software Restore CD (the one that has all Mac OS versions prior to 9) and initialized the hard drive (again) using Drive Setup 1.7.3. This time I only made a single partition. Then I updated the disk driver. This is something I don't remember doing before, at least not using Drive Setup 1.7.3. And finally I installed 7.6 and 7.6.1 from that Apple Software Restore CD.
I tried installing from that CD before and it failed, so I can only assume updating the disk driver using Drive Setup 1.7.3 did the trick. The idea came to me after reading this tech note:
http://support.apple.com/kb/DL1249?viewlocale=en_US
Mac OS 7.6 discs have an earlier version of Drive Setup (1.2.2) so it's possible 1.7.3 did something different to the disk.
Here's what I did. I booted from an Apple Software Restore CD (the one that has all Mac OS versions prior to 9) and initialized the hard drive (again) using Drive Setup 1.7.3. This time I only made a single partition. Then I updated the disk driver. This is something I don't remember doing before, at least not using Drive Setup 1.7.3. And finally I installed 7.6 and 7.6.1 from that Apple Software Restore CD.
I tried installing from that CD before and it failed, so I can only assume updating the disk driver using Drive Setup 1.7.3 did the trick. The idea came to me after reading this tech note:
http://support.apple.com/kb/DL1249?viewlocale=en_US
Mac OS 7.6 discs have an earlier version of Drive Setup (1.2.2) so it's possible 1.7.3 did something different to the disk.