Do you have another WP install in a directory named 'blog'?

As I may not be able to check back for a few days, this is what I'd guess your problem is (without really being able to look at it to be sure, of course).

Thing to remember #1 - *nix servers can be case-sensitive for URLs, depending on the configuration. While domain names are always case-INsensitive, the rest of the URL may or may not be. On your server, I think it is.

Thing #2: WordPress is NOT case-sensitive for URLs. /Blog or /blog, it's all the same.

Here's where the trouble lies...when you set up permalinks on your WP install it writes an .htaccess file to the server, containing instructions on what the server should do for each pageload. In essence, the instructions say, "if the requested URL isn't an existing file, and it isn't an existing directory, pass the whole URL to index.php".

When you request "/Blog", that directory doesn't exist (case-sensitive, remember?) and so it passes the URL to WP, which changes the whole thing to lowercase and shows you the /blog page.

When you request "/blog", the server sees the directory named 'blog', and sends you to the index file of that directory - which I'm pretty sure is another WP install that hasn't been set up yet.

Get rid of or rename that directory and your problem will go away. Just don't rename it to an existing page name.