I don't know (yet), but is it a real compressed dmg or just an image with .dmg as extension?
You might try two things:
change format=dmg to format=raw
change both the extension of the dmg to img and change the format as above
EDIT: it seems non of this works. You might create a disk image with the hfs tool, then use drive setup in mac OS 9 to initialise the disk image and see whether that image can be used to read/write in your host.