[SOLVED] Permalinks Custom Structure just gets 404

I am trying to change permalinks to display the page or post name. All the help pages say I should select Custom Structure and enter %postname%. When I do this I get is 404 on all page links.

I also get 404 selecting any of the other options on the Permalinks page.

There is a note at the bottom of the Permalink page which says I should add the following code to the .htaccess file:

<IfModule mod_rewrite.c>
RewriteEngine On
RewriteBase /
RewriteRule ^index\.php$ - [L]
RewriteCond %{REQUEST_FILENAME} !-f
RewriteCond %{REQUEST_FILENAME} !-d
RewriteRule . /index.php [L]


The help page from the Permalinks page says that I need to add this code to the .htaccess file:

# BEGIN WordPress
<IfModule mod_rewrite.c>
RewriteEngine On
RewriteBase /
RewriteRule ^index\.php$ - [L]
RewriteCond %{REQUEST_FILENAME} !-f
RewriteCond %{REQUEST_FILENAME} !-d
RewriteRule . /index.php [L]
</IfModule>
# END WordPress


It is very similar and I have tried both versions but I still get 404.

I have checked the FAQ but cannot find a suitable post.

Any idea what I can do to make this work?

I am using Atahualpa 3.7.1
How dumb is this: I do not know which version of WP I am using - where does it tell me? (but I can upgrade to 3.2.1)