Permalinks not working in 2.7 version

I installed 2.7 on my blog. I changed the Permalinks settings to %category%/%postname%. Since i done that every post is going to not found. A lot of people has posted on same problem. But i didnt find any solution for same in any of the problem posted. The problem i guess is .htaccess file. Its default setting is XXX. When you try to change it to 777 it shows permission denied..tried all ways to change it not working….please please suggest a solution…