I'm having exactly the same problem with the current version which I downloaded today. Earlier 1.7.1 version work perfect on the same host (one.com), so does WordPress with exact the same db setting.
There are some strange things going on. The config file stores the password with a trailing ">". Uploading the config file manualy doesn't work either, in that cases the file just gets deleted. I've seen it happen with my ftp client running in the background.
Pixelpost team, are you sure the files haven't been altered?
There is a screenshot (made by someone else) in this thread
. I'm getting the same error, while the connection is working perfectly two step earlier.