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That means that XOOPS cannot connect to the database server.
Nothing to do with whether your database exists or not.
So, make sure you specify the database server (or host) correctly when prompted, also a user and a password which work. The address of the database server you have to get from your webhosting company. It's the same to which phpMyAdmin connects if you're using that. You might find the address of your database server on the first page of phpMyAdmin if you can connect. The user and password are also the same with which you connect to the database through phpMyAdmin.
If you're trying out on a local install, with Xampp or any of those as server, "localhost" normally does as the database server. You could try with "root" as user and an empty password.