The "IIS APPPOOL\AppPoolName" will work, but as mentioned previously, it does not appear to be a valid AD name so when you search for it in the "Select User or Group" dialog box, it won't show up (actually, it will find it, but it will think its an actual system account, and it will try to treat it as such...which won't work, and will give you the error message about it not being found).
How I've gotten it to work is:
As long as the AppPool name actually exists, the login should now be created.