“Error establishing a database connection” with Local Host

I’m trying to set up a WordPress blog on my local system to work out formatting, etc. before I go to a live server. I’m following the standard WordPress instructions.

When I try to run http://mynewsite/blog/wp-admin/install.php,
I get an error: “Error establishing a database connection”

The facts:

1) I use XAMPP and am running Windows XP.
2) localhost is running and the MYSQL database has been created on the localhost server.
3) The entries in the wp-config.php for database name, username, password and host are all correct. (I checked over and over.)
4) “Server” for the database is “localhost” (I used myPHPadmin for the setup.)
5) However, I access my site through the path http://mynewsite/.

(I have this set up in the hosts file. ie:
…
127.0.0.1 localhost
127.0.0.1 mynewsite
…
)
because I have more than one website I am currently working on.

I have no problem accessing the blog that I have through the older website that I access directly through http://localhost.

Could this be happening because of how I access the newwebsite — or because this site is under a different directory structure ? If so can I change the install files in some way to resolve this ?

Thanx ! (lost in the woods…)