This has been discussed before:
http://discussion.dreamhost.com/showthreaded.pl?Cat=&Board=forum_troubleshooting&Number=40241&page=&view=&sb=&o=&vc=1#Post40241 (Thanks, Raz!)
Sure wish I knew how to make links work in this forum. But here's a cut and paste:
That is not possible on DreamHost. For some reason they absolutely refuse to follow the standard method of allowing additional users to only subdirectories. Instead, you have to use this round-about and extremely buggy way. Anyways, create a new ftp user (eg. userone). Then you have to create a subdomain instead of the subdirectory. So if you wanted mydomain.com/userone, then create the subdomain userone.mydomain.com with the ftp user set to the one you created (userone). Then you must use the remap Subdirectory feature (under Domains in the navigation) to remap the sub-directory (mydomain.com/userone) to the subdomain (userone.mydomain.com). For FTP, the new person connects to the subdomain using their user/pass and must put all their files in the directory (have to create it) that you choose when you created the subdomain. (eg. home/userone/userone.mydomain.com/) This is pretty ridiculous, I know, but that's how it has to be done on DreamHost.
By the way, you cannot use your main (admin) ftp account to connect to the subdirectory. Only the other ftp user can do that. Also, there seems to be some serious php problems with the subdomains/remapped sub-directories because of the php can only be run as cgi and this causes some ownership issues. I talked to DH about it but they said that it will likely not be fixed for a few months because of other issues they must attend to.