Hofmockel.org

Symptom: 'Internal Server Error' on new install of Drupal. Removing .htaccess file solves the problem.

The .htaccess file is the only thing in Drupal that can cause an
'Internal Server Error (500)'. This is most likely caused by a
misconfigured or restricted Apache configuration (Some hosts don't
allow PHP directives in .htaccess).

Solution:

1. Reconfigure Apache if possible.

2. Delete .htaccess file. It is not required but it is recommended.

3. Add the following code to the top of the .htaccess file. Some
hosts may not allow this 'Override'. It over rides the Apache config
settings. Requires AllowOverride directive be set in Apache conf file.

...

AllowOverride All

FYI - In my case the following lines in the .htaccess file caused
the 500 error. Any one line caused the error so I had multiple lines of
failure. Commenting them out also solved the issue.

# Set some options.
Options -Indexes
Options +FollowSymLinks

# Reduce the time dynamically generated pages are cache-able.

ExpiresByType text/html A1

# Override PHP settings. More exist in sites/default/settings.php, but
# the following cannot be changed at runtime. The first IfModule is
# for Apache 1.3, the second for Apache 2.

php_value magic_quotes_gpc 0
php_value register_globals 0
php_value session.auto_start 0

php_value magic_quotes_gpc 0
php_value register_globals 0
php_value session.auto_start 0

# Set the default handler.
DirectoryIndex index.php

ref: http://drupal.org/node/31725

excerp from errant conf file that caused problem including solution:
Second line should be "AllowOverride FileInfo AuthConfig Limit Options
Indexes"

#

AllowOverride FileInfo AuthConfig Limit Options Indexes
Options Indexes SymLinksIfOwnerMatch

Order allow,deny
Allow from all

Order deny,allow
Deny from all