Can one host multiple store on Magento Community Edition? And how to automatically create a subdomain for each new store when it's set up?
Yes, you can run multiple sites from Magento community edition. The Official Magento blog actually just had a post about this that you may want to check out: http://www.magentocommerce.com/blog/comments/from-the-support-team-multi-site-domain-name-setup/
The gist is that you need to create a new store in the Admin backend. If you are not using the same product catalog for both sites, you will also need to create another "root category" in your catalog category setup, and specify that category as the proper root for your second store.
Finally, the subdomain problem. Depending on what kind of server setup you are running, this could be the tricky part. If you have full control of the server (best idea, since running Magento on shared hosts is a bit problematic from a resource point of view), add vhosts to apache and set the environment MAGE_RUN_CODE and MAGE_RUN_TYPE variables in .htaccess for your site.
I don't see any easy way to set up the subdomain when you create the site, though. You would need to write apache to create hosts and modify .htaccess, which would take some nontrivial development to get done from the Magento site.
Much more detailed answer on the other end of that link. Hope that helps.
Thanks, Joe