If you want to build the cloth using curves you have to do a lot of little curves using EP CURVE tool to make the circle and make sure all the edges line up perfect. If you just use a nurbs circle its not going to be coplanar which is why you get the error.
The easiest way is to make the circle in polygons then covert into a cloth object.
I am enough of an artist to draw freely upon my imagination, knowledge is limited, imagination encircles the world. (Albert Einstein)
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