Thank you for taking the time to file this report and helping to make
Ubuntu better.

The information in the description shows that level3.img is owned by
root:root, and that the reason for not being able to use level3.img was
due to permission being denied.  Could you chown libvirt-qemu:kvm
/tmp/level*.img, and try again?

Note: since libvirt chowns the files before using them, it actually
seems more likely that level2.img or level1.img would be the problem.  I
can devise one or two sequence of events and experiments which would
cause one of the base image files to be inaccessible to libvirt.  That
might be a real bug worth bringing up upstream.

** Changed in: libvirt (Ubuntu)
       Status: New => Incomplete

** Changed in: libvirt (Ubuntu)
   Importance: Undecided => Medium

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https://bugs.launchpad.net/bugs/696318

Title:
  Starting VMs on qcow2 format with base images in level three fails

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