As the error message states, the iterative solver for algebraic loops is not able to solve the loop in your system because it involves variable-size signals. In that case the loop needs to be eliminated by a redesign of the model or by breaking the loop by adding a Memory block for instance.
See http://www.mathworks.com/support/solutions/en/data/1-16V6S/index.html?solution=1-16V6S for more details.
