I invaded and took 2 cities from the Vikings and created Americans out of it. I intended to take over the whole of Scandinavia and give each city to the Americans as I capture them. To my surprise, I found I can't give the cities to my vassal. :( Option isn't there on diplomatic screen. Any solution for this?

In the same window where you choose to grant independence to your soon-to-be-colonies, you can also liberate certain cities to other civilizations.

I had the same problem. Conquered cities must be granted independence, that is you must have at least two cities on the same continent before you can do it. They will then be assigned to your existing vassal on that continent. I had fun conquering Brennus' cities and handing them over to Ragnar, my puppet ruler.

If you found a city yourself you can liberate it to your vassal as a unit.

Interesting note on liberating cities near your own , the culture you had stays intact. The liberated city has to deal with culture pressure, not you.

Each city gets you +1 diplo, which is pretty neat.

maybe he can't afford the maintanance.