well first off, are you setting up MT with a MYSQL database or a Berkeley Database? If you're not sure, go back and read through the mtinstall.html under your Docs directory.
But based on the error that you are getting I believe that you are setting up MT with a Berkeley Database. I'll start by reccomeding that you use a MYSQL database instead, it's really much much better.
If you still want to set it up with your berkeley Database, first check, as above, and see if your directory really exists... did you create it? Then if it's really there it gets more complicated. I heavn't set up a Berkeley database with dreamhost so I don't know exactly what the directory string needs to look like, but it will be somthing to the effect of /host_machine/username/yourdoamn.com/mt/db But it can be really tricky to figure this out. Basically the directory you need to specify is one that will make sense to the computer excuting your commans.
It's actually really easy to set up a MYSQL database you can create one through your control panel - it's under Goodies -> MYSQL. just set up a new DB, create a user name and pass, and the host name. Then all you have to do is un-comment the lines in mt.cfg about the MYSQL database and change them for your new DB to look something like:
And then run install! It's that easy. I really like MYSQL if you didn't allready guess Hope this helps. Let me know if you have any other problems, I maintain several MT isntalls here on my domains hosted here at wonderful dreamhost!