I had the same exact problem yesterday. You need to contact DreamHost support to fix the problem. Here’s what they wrote me today and I was able to install with no problem:
[quote] I see what’s going on…
The database server that you are on (sizzle, dandilo, riffraff) are ALL
mySQL 4 database servers.
I’ve set it up so all future databases will be on mysql 5 machines.
So ahead and try the installation of Moodle again, using a NEW database
(create a new one).[/quote]