Wow. What a mess! I am assuming you got those error messages from within the DH Control Panel? From your error messages it looks like the code for the Panel "broke". It also kinda looks like you somehow got the directory set up as a webdav directory instead of just assigning hotlinking protection to a regular directory via .htaccess.
If this is what happened, it explains why your hotlinking protection did not work and why you can't manage things with ftp (ftp will not work in webdav directories).
Don't believe everything you hear! Dreamhost support, in my opinion, is excellent and they have always responded well to my requests for help. Remember that Dreamhost currently hosts over 300,000 domains, and those that have good service generally do not write about it on the forums. A great deal of the negative reports you see on the forum are from a relatively small group of dissatisfied users who are just whining because they got in over their heads, don't understand enough of the basics to be properly helped by the support response they got, or are simply complaining about having to wait for an email support response instead of having the privilege of complaining over the phone.
It may require a support contact to straighten this out at this point, and even if you are able to "recover", you should report the error so that DH can look into it and determine what happened and/or how to fix it.
There are still a couple of things I would try. How are you connecting to this directory right now (ftp, shell, only the Panel configuration screen?). Try going into this directory via the shell, and deleting all the "stuff" you added (.htaccess file?). Also make sure you have the permissions set to 755 for this directory. Once that has been done, see if you can copy files to/from that directory via ftp. If so, you , have probably "fixed" it back to the way it was and can take another shot a configuring it properly via the panel.
You only want to use the "hotlinking", and not webdav. Make sure you do not check the box that says, "Enable Webdav for this dir". In addition to identifying the directory, there are three options on the set-up page:
1) Password Protect This dir?
2) Enable Webdav on this dir?
3) Forbid Linking to files in this dir?
You only want to check number three! And enter the domains you want to be able to link (your own?) to the files where indicated.