permalink problem

Hi

Started a new blog on WP 3.1.

I am having a problem with permalinks. I have set a custom /%postname%/ in permalink settings, my WP could not write to the .htaccess file so I copy.pasted the code produced

<IfModule mod_rewrite.c>
RewriteEngine On
RewriteBase /blog/
RewriteRule ^index\.php$ – [L]
RewriteCond %{REQUEST_FILENAME} !-f
RewriteCond %{REQUEST_FILENAME} !-d
RewriteRule . /blog/index.php [L]
</IfModule>

I can open my blog home page but get a 404 error when clicking to read the post. The address bar reads http://wwww.mydomain/blog/blogtitle/

From the dashboard when editing the post under the title I have a permalink displayed Permalink: http://mydomain/blog/blog title/ but i the address bar is http://mydomain/blog/wp-admin/post.php?post=35&action=edit

When I click view post in the edit section I get a new screen with a not found error with this in the address bar
http://www.mydomain/blog/blogtitle/

I have checked my .htaccess file in the wp-admin folder and it has the code written to it, I don’t know if its relevent but the default file setting is 755, the default setting on the wp-admin folder has no number just 3 x’s (xxx) the default setting for my blog folder is 755.

I do have Yoast SEO plugin.

Apologies if I have over done the info, just really stuck and want to help you help me.

Many thanks