Can't Create Dive Image

How far into the backup process did this occur?

I would guess this error is from the source drive (the drive(s) to be backed up) as I would think System Image looks a that the volume's bitmap, collects all the sectors that need to be written, and then writes them to your USB output drive as a "sequential" file (only used blocks written, butted up next to each other, no freespace). IOW, there are "direct" sector/cluster reads of the source drives and the output is simply written to a .vhd file of which the I/O is handled by a standard Win API.

The error is occurring right near the end of the backup attempt.

1) How much data are you attempting to image (eg. 30GB)?
2) How much free space do you have on your ext HDD?
3) Are you doing a Windows "Let Windows choose" backup including an image AND a file/folder backup?
4) Have you scanned your ext HDD for errors? If not try the manufacturer's diagnostic tool or the Windows inbuilt sector scan.

1) The size is 39.7 GB.
2) My external HDD has 417 GB free.
3) Not surer what you mean. In Windows "Back and Restore" it simply searches for a backup device and it selects the external HDD which is the only other drive. Then I click "Start Backup".
4) Yes I have scanned for errors and I also defragmented it. I used third party software. But where might I find Windows sector scan?

I researched the actual Win32 API error code (sector not found) but can't find someone who has explained WHY that error gets returned (i.e. what does the app have to do incorrectly or what could happen hardware-wise to receive the error).

I don't disagree Wolfgang. Using Macrium is a pragmatic solution - you know I use it.

But it would be nice to know the cause of the error. I didn't think images needed to be contiguous files???

I installed Macrium Reflect and it created a disk image with no problem. I think I'll stick with Reflect. Thing went ok except when I created my rescue media. Reflect downloaded the AIK which took some time.