The exact error was
Free at least 422 MB on the physical hard disk that stores the “My Boot Camp” virtual machine and try again.
The error was thrown when I started Windows on Mac which was install as virtual machine on Parallels.
This KB Byte pretty much addresses it which means free up some space on you MAC drive (not windows as you might think)
But it needs some explanation
1. hysical hard disk that stores the “My Boot Camp” => your physical drive that is mac os X drive
2. The error is somewhat misleading because I did have some 6GB free space on mac drive but it still complained about not enough space and 422 MB which was in correct. Basically I further deleted 1.5 GB of files and Parallels started properly.
Also not that initially I though it was the Windows drive that it was complaining about but it it has only some 40MB free space but that was not the problem.