national upgrading disaster

Hey there,
I apologize first of all because this post is likely to be confusing. I’ll try to be as concise and clear as possible.
On my domain, sea-glass.org, I’ve set up two directories for MT. One has always been my “test” directory, where I try things out before putting it on my live directory. That test directory is sea-glass.org/wp
Now, today I decided to upgrade from 1.01 to 1.2. So I followed the upgrading directions and popped everything into my test directory. I noticed that I couldn’t just replace the template files with my old ones, so I started tinkering around, making sure I was only touching design-based things.
Somehow (and this is where I may lose you) my “blog” (i.e. live) directory got…OVERTAKEN by that test/wp directory. I have no idea how that happened. If you go to sea-glass.org/blog my site shows up fine. But, I cannot login to my blog directory’s wo-login.php. When I log into my test directory’s wp-login.php and post, both http://www.sea-glass.org/wp AND http://www.sea-glass.org/blog show that entry! VERY bizarre. To make matters worse, when a reader clicks on the comments link, it takes them to a post that’s within the wp directory (even though they originated from the blog directory) and if they hit ‘submit’ to comment, there’s an error msg that comments-post.php can’t be found. And it’s clearly looking for that file not in the wp directory NOR the blog directory, but reverting to my root sea-glass.org directory.
This is just psychotic. Tell me, is my best best reinstalling the whole thing? I have this paranoia not necessarily of losing stuff (I’ve backed up my design files, which matter the most) but of never being able to login to my blog again. Hehe. Any advice at all would be great, and thanks for the help.
reese