I ran into this as well. For some reason installgrub needs slice 2 to be the special "backup" slice that covers the whole disk, as in Solaris. You actually specify s0 on the command line since this is the location of the ZFS root, but installgrub will go away and try to access the whole disk using slice 2 for some reason. What I did to solve it was to use format to select the disk, then the "partition" option to create a slice 2 that started on cylinder 0 and ended on the final cylinder of the disk. Once I did that installgrub worked OK. You might also need to issue the command "disks" to get Solaris to update the disk links under /dev before you use installgrub.
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