That should only happen if you attempt to use the same email address (Live ID) to create a new account; when you sign in, you should be able to use the Live ID.
You also might try "recover gamertag" if that really isn't working.
There's no way to close a zune account, but you can shut down the entire Live ID at accounts.live.com.
Jessica Zahn, Zune Social Program Manager ~ This posting is provided as-is with no warranties, and confers no rights.