using plugin 3.3 and wp 3.7.1, i also meet the 404 error bug with dropdowns : dropdown form sends me to : http://rafonthenet.net/pgearth/?country=http%3A%2F%2Frafonthenet.net%2Fpgearth%2Fcountry%2Ffr%2F while it should only send to http://rafonthenet.net/pgearth/?country=fr which would point to the right page.
having a look at the form, it looks like the values for the select options are the full url : "... <option class="level-1" value="http://rafonthenet.net/pgearth/country/fr/"> France (4)</option>..." and that if should work fine if you only had the taxonomy slug as the value instead of the whole url.
so i changed line 289 of list-custom-taxonomy-widget.php for :
$getTax = get_term( $term, $term->taxonomy );
$taxSlug = $getTax->slug;
and line 298 for ` $output.= "\t" . '<option' . ' class="' . esc_attr( $class_name ) . '" value="' . $taxSlug . '">' . esc_html( $text ) . '</option>' . "\n";
as i far as i tested, with %postname% as permalink in my case, this works fine on my install (http://rafonthenet.net/pgearth) for dropdown as well as lists.
last thing : i m not pro coder, just a leisure occasional php user, so i don't guarantee this will help you for sure, at least it solved my case..
thanks for the plugin anyway, will gladly use it and review when the dropdown bug is solved ;)