@Saurus - I have no .htaccess file at all. The one that is created when I select anything but the first option on the Permalinks options page results in an instant HTTP 500 error. Deleting the created .htaccess file returns the site back to health, but simply going back to the Permalinks options page (without saving or changing anything) results in the .htaccess file being re-created and sending the site back into HTTP 500 errors.
I was able to get through this by (a) going to the Permalinks options page, (b) setting it back to the first option, (c) submitting the page (which results in a 500 error caused by the .htaccess file created in step a), (d) deleting the .htaccess file in another window/app, then (e) refreshing the page with the 500 error, which resubmits the form without an .htaccess file present. This has happened twice to me now, both on fresh installs.
I cannot explain how thousands of sites work fine if they have changed the Permalinks options. I can simply relate what is happening to me and my site.
Any *helpful* thoughts?