I set up a web template and I get the database error below:

MakeDB - DB Connection fail.WARNNOTCONNECTDB

I have attached my configuration for the template in this mail.

Another question is how do I get a right domain name to choose when I create the site? I thought the variable {site_domain} will give me a list of domain names I have created to choose from but it does not and I am not asked the domain name either. So, how do I get to enter the right domain name?

The error message mean the JMS is not able to connect on the DB.

Based on the JMS Templates definition, I see that you want to create DB dynamically and also create MySQL user dynamically.

In this case, it is important that JMS has a MySQL user that has enough privileges to create the new DB and new users.
JMS first try to use the DB MySQL user that you provide in the DB to replicate or user the root MySQL user that you have defined in the multisites.cfg.php configuration file as explained in the user manual.
So if you have not defined a MySQL root login or that (in your case) the Master DB does not have a MySQL user that has the permission to create dynamic DB this may explain why the DB can not be created.

Where do I specify the root login ?

Read the user manual.
This is explained.
ie. page 14

Hello. I am having the same problem as the author of this thread. I went to PHPMyAdmin and created a MySQL user w/admin privileges and entered that info into multisites.cfg.php but I kept getting the same error. Then I enter the server's root user name and password, but I still cannot create dynamic databases.

I am able to successfully create sites by letting multisites add tables to the master database, but I fear the database growing too big (we're going to host 150-200 sites) so I want individual databases for each site.

Please advise.

Have you already tried to provide in JMS the MySQL user that is used by PHPMyAdmin to manage the MySQL db.
By defintiion, this PHPMyAdmin user has all the privileges.

You can also test the MySQL user and password to see if it can create the DB when you create a fresh slave site.
In this case, you are using the standard joomla install and when it ask the DB configuration parameter, if you provide a new DB name with the MySQL user and password, it should create the DB.
If you succeed with this joomla installation and if you repeat the same procedure with JMS slave site parameters then this will need debugging on your environment.

If you have a MySQL message that is returned, wouldl you please provide us to see the error code.