Upgraded to 2.7 RC2 – pretty premalinks stopped working

I just upgraded to 2.7 RC2 and after trying to upload images and getting the http error, I added an .htaccess file that contained:

<IfModule mod_security.c>
SecFilterEngine Off
SecFilterScanPOST Off
</IfModule>

that corrected the upload problem. Now the only issue left is my day/name permalinks don’t work. All post links go to 404. If I switch back to the default permalinks everything works fine. After switching to day/name permalinks, the new admin tells me I need to update my .htaccess file with:

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

Since the only .htaccess file is the one I added above, I added this code as well but it did not help. Also the new admin tells me it could do this if my .htaccess file was writable. I changed the permission to 777 but this doesn’t help me either.

Thoughts on what I can do or have done wrong.

Thanks