Not sure if this is purely a 1.5 issue.
Currently on 1.5-gamma 2005-02-05, same symptoms on earlier versions.
If the Blog address is set to the wordpress directory, WordPress can happily create and update the .htaccess file.
If the Blog address is set to the root of the site (which is how I prefer to have my sites), while everything else works, WordPress tells me that .htaccess is not writable. Same result regardless of permissions. The rules it creates when copied into the .htaccess file and uploaded work as expected.
I've done some searching and googling, but haven't come across this particular situation.
Is this a limitation, a feature, or is it just me?
This is on my test site, not the one linked from my name.
 My live site is with a host that's on Windows servers, so .htaccess isn't an option
 Yes, I know. Moving to Dreamhost soon :-)
 Always a good possibility