May be a bug, However I had the same problem and in may case when I zoomed out to the cloth map I discovered I had founded my city surrounded by forest (even tho on the screen it didn't look very foresty) turns out you can't build in a forest.

The feedback isn't that great.  Sometimes you might be too close to another city (gotta be 5 tiles away, I think).  You could be on terrain that doesn't allow it.

If you're getting a tile not empty message, as others have said, make sure you're not on a forest, hill, road, etc.