I faced this problem in WordPress 2.8.6 and solved it by following these steps:
1. Create a blank .htaccess file in Blog folder.
2. Go to Settings-> Permalinks
3. Select a common setting.
4. Save Changes.
5. Copy all code from Permallinks (code showing at the bottom of Permallinks screen) and past in .htaccess file.
6. save you .htaccess file.
7. Change this .htaccess file with 777 full write permission. (This step is very important)
8. Repeat once again Step 2, step 3, step 4. (You may not need to follow step 8 (Optional))
9. Post a new or Edit your old post
10. Confirm your Preview Changes by clicking it.
If you are still facing this problem, please copy code for .htaccess file from Permallinks and paste it to .htaccess file in WordPress core file folder. Give full write permission (777). Try preview (Step 9 and Step 10)
I hope it will work fine.
If everything is allright, please change .htaccess file permission 705 or 604 for your web security.