kim-_nz, thanks for that tip. Where did you find that file on your server, and how does one go about downgrading? I have excatly the problem you are describing, I too thought at first it was WLW and thne also thought it was something specific to WP 2.6.2, because on several blogs that have not yet been upgraded to.6.2 the problem did not appear.
For those who made a lot of helpful suggestion re. HTML and the Visual editor, this is a weird problem where WordPress displays _partial_ HTML instead of th desired human readble form. In other words, a paragraph which should read "This is my paragraph" and which of course in HTML shows "<p>This is my patagrah ... instead displays as " p>This is my paragraoh ... (note the leading '<' character is stripped of, breaking the code.
It's been really, really frustrating the past few day sas every single blog post has to be hand edited, character by character in the HTML editor to put the borked code back into readable format.