VMware restore to files fails with “Failed to prepare target FileSystem for the restore” (4041554)

When restoring VMware backup to files on local volume the Binary log reports error “Failed to prepare target FileSystem for the restore”. Looking at the trace we see it reported there is not enough space on the disk. ' or Unable to allocate space for restore of a VM files

From binary log:

Error 2016-10-19 09:54:40 2604 Data Plugin NETVAULT-SI-BCK1-SO [SP-SINENGIN1-SO] Failed to prepare target FileSystem for the restore

Extract from VMware trace:

2 VMWLOG ??? 5872 1 0 95440213371 Set Log Identifier as [SP-SINENGIN1-SO]
0 VMWRESTR ??? 5872 801 0 95440298666 Space Allocate Failed: 112 : 'There is not enough space on the disk. '
0 VMWRESTR ??? 5872 683 0 95440298678 Unable to allocate space for 'D:\XXXTESTXXX \\ XXXTESTXXX \Backup\TEST _UA.hdb\TEST_UA.idb.d'
0 VMWRESTR ??? 5872 670 0 95440298701 Failed to prepare filesystem for restore.