I have reverted this to use WordPress Default, and am not using permalinks at the moment.

I am investigating the sql file and my (very few) plugins but I don't know if the issue is there. I think it may have to do with rules for Lighttpd. Using lighty has been a struggle really, especially when you encounter errors, because at the back of my mind I often wonder if it has something to do with it.

And no I didn't make a backup, so SEO with this site is screwed. I'm glad this blog is only targetted towards friends and family. Otherwise if I had done this to Mom, Kikay or BallEx I'd be banging my head against the wall right now.

UPDATE!: Reported it here, and realized I was not alone in the issue, as there are reports of permalink errors worldwide on what I suppose are non - Apache webservers (lighttpd, IIS, etc.). I realize I have the option to restore this blog by downloading the most recent version (2.5.1) and getting the backup sql from yesterday, but I think I'll wait for a resolution instead. Besides this is just a personal blog, unlike the others.

Thank God for wp-backup which I programmed to email a sql backup copy to my gmail everyday. Of course I auto-archived it on Gmail, so I totally forgotten about it. Isn't it great when things just work?

As for WordPress 2.6, this issue looks like its on its way to becoming as bad as the categories to tags issue that went unresolved a few versions ago. I'm glad it's not a security update because damn, I can't update all my blogs until this error gets resolved.

UPDATE AGAIN!

As of this post, you merely need to go to Settings > Permalinks then enter the word 'Category' at the 'Category Base' and 'Tag' at the 'Tag Base' like this:

and Voila! Fixed. Super thanks again to Otto, for consistently saving the ass of bloggers all over (including mine) consistently for years (yes years).

Won't be updating the other sites yet though. I gotta wait till everything gets resolved first before I commit the other blogs. Downtime with those things gives me high blood pressure, dizzy spells, panic attacks, demonic visualizations, end of the world cataclysmic visions and rheumatism.