I also had the same problem when attempting to install apps from the market, also had the insufficient space error. Go back to page 12 of this thread and follow the instructions given by Bob on post# 576. Works perfectly. Thanks to Bob.
Shortcut link:
http://androidforums.com/optimus-m-all-things-root/403689-rom-wip-cm7-2-0-rc0-bobz-12.html
Try moving and/or deleting the 01mvdalvik file out of init.d, located here: /system/etc/init.d/01mvdalvik, clear market cache and data, reboot recovery, wipe cache/dalvik_cache, reboot.
Ok Tried that with Root Explorer. It wont let me move, delete,rename It says its a system file