[Simon]

I haven't upgraded any 2.3 installations to 2.5 yet, but I do have a new installation of 2.5 that's not having any trouble. I'm using custom permalink structure to get domain.com/blog/pagename and domain.com/blog/post-name.html and posts and pages are showing up just fine.

In case this is an 'upgrade-only' problem, it might be worth trying this.

Export your current database (or use the pre-upgrade export or backup you made) and then create a new fresh database to use with a new fresh install of WP 2.5. When you have a virgin db and virgin WP installation, check that the default settings work fine for making things show up as they should. Once you're sure of that, set your permalinks the way you want them, update your .htaccess file, and see if everything still displays the way it should. If everything looks good, you can import the data you exported from the other database. And hopefully that will take care of things.

Note: you can test this in another directory first if you don't want to take your live site offline. Then, if this fixes the problem, you can swap the old installation for the new one.

HTH