Permalinks and Manage Files Problem

First, I installed WordPress in the /blog directory, and everything worked fine. I then followed http://codex.ww.wp.xz.cn/Giving_WordPress_Its_Own_Directory and copied index.php and .htaccess to root. I updated index.php to require (‘./blog/wp-blog-header.php’)

I now have two problems:

1) when I go to Manage -> Files, it cannot find .index.php or .htaccess (even though both exist).

2) I cannot update permalinks. I get “you should update .htaccess now” error (permissions on .htaccess are set to 666).

I put everything back so index.php runs from /blog, and both problems went away. But when I changed it again so that index.php runs from root, both problems re-appeared.

I have another blog on a different server, have done the same thing and it works both ways. But on my blog on server “B” I get these problems.

This has been driving me absolutely nuts all day, so any ideas would be greatly appreciated!