Those walls are just the other city boundaries. The problem with Aldgate was that there was no room for expansion outside the original boundaries. Those 9 squares are the limits of where we can build without straying into occupied territory.
My suggestion: Start in the middle of the blue area marked out by Mr.E, and let it grow naturally. Individual areas can be segregated by 1-block thick inner walls. I'll be back on Sunday night, so I'll leave it up to the other mods and active builders to work out sensible segregations for the initial areas. I'd suggest an admin area (city hall etc) in the centre, and watch towers on nearby high land.
EDIT: Maybe I'm biased, living in a beautiful city build around an ancient carboniferous volcano, but NO FLATTENING THE CITY LAND!
Agreed.
Just leave nice patch of land for a Admin keep, and just start building the city.