For some reason, my installation of Windows Liver Writer will not allow me to select any of my other MT blogs (apart from the main one) when I go to set up an account. Instead I get the not useful error message "An error occurred while attempting to connect to your weblog: Blog Server Error - Server Error 1 Occurred Invalid Login You must correct this error before proceeding."
I know the password is correct as I've just used it to log into the system.
Another annoyance is the version number of WLW. Help/About displays the following version - 1.0 (12.0.1183.516) - nowhere does it mention that this is beta2. As the WLW website also doesn't tell you which build Beta2 is, it is pretty hard to tell whether you are on the latest version or not.
That's the answer I get out of my Windows Live Writer, so you're at Beta2.
I don't have an MT account to even try and replicate. :(
Not sure which version of MT you are using but if I remember correctly from 3.2 you had to set a different API password for each user account (this is because the password has to be stored as plain text in the DB and not as an MD5 hash as per normal). You might want to check your user settings.