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It appears that current versions of QGIS running on Windows may not be able to activate Grass when creating new Mapsets from the Grass toolbar - it opens existing Mapsets as expected so a workaround is to create the Mapset directly in Grass and subsequently open it in QGIS as an existing Mapset.

The "New Mapset" toolbar menu progresses normally to the final screen confirming the new mapset details. Clicking "Finish" returns a pop-up saying"cannot activate Grass" - screenshot attached.

Nothing seems to appear within the QGis logs, general or plugin.

This has been verified using both 2.8.1 and the current development version 2.9, both installed from OSGeo4Win on Windows 7 using both standard and admin user accounts.

Reports have also appeared on Stack Exchange (http://gis.stackexchange.com/questions/137025/error-when-creating-a-new-mapset-with-grass-in-qgis) and the OSGeo QGIS mailing lists (http://lists.osgeo.org/pipermail/qgis-user/2015-March/031193.html).