I currently have 2 x ASP.NET 3.5 web applications in IIS7 (lets call them WebParent and WebChild).
WebChild is nested within the WebParent listing in IIS7 and is set
The exact solution to your problem will depend on what configuration exception message you are seeing. However, this is a typical problem that can often be solved through use of the inheritInChildApplications attribute on the location element in the web.config for "WebParent". By wrapping the entire system.web section in a location element as follows, you should be able to eliminate the problem you described:
With IIS 7, you will also want to wrap the system.WebServer section the same way:
This solution is based on an excellent blog article that I found here.