I was having trouble with this as well, and this thread helped me get things working. But I wanted to clarify, in case someone else comes along:
In your config.php – the “host” needs to be “mysql”
but in your permissions for the wordpress user, the host needs to be “localhost” (if using phpMyAdmin, drop down on the “host” field and choose “Local”).
This got things up and running smoothly.
Now I just need to see if Yahoo will let me use permalinks (.htaccess)… we’ll see.