This error comes from an improper setting in the make file that is generated. To overcome this problem:
1. In XPS, right-click your software project and select Set Compiler Options.
2. Bring the Path and Options tab forward.
3. In the Other Compiler Options to append field, add -mno-xl-soft-mul
4. Press the OK button.
If the hardware multiplier is removed from hardware, this compiler option also should be removed.
This problem has been fixed in the latest 10.1 Service Pack available at:
http://www.xilinx.com/support/download/
The first service pack containing the fix is 10.1 Service Pack 3.