I've had the same problem.  Fresh install of Ubuntu 10.04 server, standard 
transmission install from repositories.
I followed this writeup: 
http://1000umbrellas.com/2010/04/21/transmission-install-on-ubuntu-10-04-server-lucid
including using the same settings.json file 

I can write files in the two directories targeted in the .json setup.
I've changed all the directories specified in .json to 766 permission level.

Using the web gui I can upload a target torrent file and it starts to
download the torrent data but as soon as it tries to save to disk it
gives me the permissions error.

-- 
permission denied
https://bugs.launchpad.net/bugs/530193
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