How to create/manage different url per user for single site having one code base

Hi All,
I have requirement where user while registering to site gets an option to define their site url.
for example:
In google blogger, user gets an option for his blogs url which may be like www.XXX/blogger.com
In similar way we want to do it for our project.With single installation of drupal we want to achieve this.
Its mean that user will get an url for his account and he can add content to it,He can access those through his url.Its going to be like multiple sites.

Possible solutions i can think of are
1.We can create multiple site using single code of Drupal by creating folder in sites directory.
problem: We need to make entry in host file for new sites. That we can not be done while creating user.

2. We can use the apache rewrite rule where we will map the user defined url to internal simple url.
i dont know how to do this.This is a just a thought.

can some one please help me in figuring out what would be best solution to achieve it and how.
Its something urgent.
Thanks in advance.