I have the same problem.
I use WordPress 2.3.1 as part of a bigger site and have it installed in its own subfolder.
At the root, I have an .htaccess which does url rewrites for the non-wordpress part of the site.
The rewrites work great for non-wp, but stop working as soon as I enable wp permalinks.
The conflict, I think, is caused by the internal wordpress rewrites, because even when I delete the wp .htaccess from the wp subfolder (and leave permalinks enabled), my non-wp rules don’t work.
Now I have disabled the permalinks until I find a solution.
My non-wp rules are like this:
# Add Trailing Slash
RewriteRule ^items/([-a-z0-9]+)$ /items/$1/ [NC,R=301,L]
# Main Rewrite Rule
RewriteRule ^items/([-a-z0-9]+)/?$ /index.php?page=items&item=$1 [NC,QSA,L]
The custom rules are fairly standard stuff, and are kept in their own htaccess at the root. I don’t know why wordpress, which is in its own subfolder, interfere with them.
Appreciate your ideas.