"Please insert volume Harddisk into any drive !" :-)
Never saw this before. Seems like the HDD mistakenly identifies itself as a removable device. What happens if you enter Diskchange HD0: into the shell window ?
Did you boot with the Workbench disk and started HDToolbox from there or did you boot from the Install disk. You should do the latter. If you can get hold of some 3.1 floppies you should install the FastFileSystem V40 onto the HDD. Might be there is a bug in the V39 one. If the bug is in the V39 scsi.device you need a new Kickstart ROM.
Does the HDD have jumpers ? Perhaps there is one "identify as if no disk is present". (Of course it is labelled totally different so that nobody knows what it means).
Bye,
Thomas