Thank you all for all the information. I manage to workaround this problem.
After the installation failed due to the "locale" issue, I restarted my system, 
selected the latest installed kernel, tried Ctrl+Alt+F1 (which showed me the 
boot process in console mode but in the end I was still under Gnome logged in), 
and then I just opened a terminal under Gnome and perform the apt-get 
dist-upgrade and the dpkg-reconfigure -a.
It was painfully slow, but in the end worth it, as my system seems to be 
working properly.

-- 
Gutsy->Hardy upgrade hangs in localedef
https://bugs.launchpad.net/bugs/249340
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