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I have a dedicated server with Windows Web 2008 OS. My understanding is that this license doesn't allow to run Hyper-V. Are there other no-cost/low-cost options to creating production capable VPS instances that could run an e-commerce website on this dedicated box such that the IP and access to the e-commerce site is solely to the VPS?

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Hyper-V Server is free, and you can run Windows Web Server 2008 (or any of the other Hyper-V supported Operating Systems as a guest) assuming you have a license to the guest, which it sounds like you do).

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VMWare Server 2.0 is free and runs on Windows and Linux.

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