Just had a similar issue
Resolved it by checking in httpd.conf
# AllowOverride controls what directives may be placed in .htaccess files.
# It can be "All", "None", or any combination of the keywords:
# Options FileInfo AuthConfig Limit
#
AllowOverride All <--- make sure this is not set to "None"
It is worth bearing in mind I tried (from Mark's answer) the "put garbage in the .htaccess" which did give a server error - but even though it was being read, it wasn't being acted on due to no overrides allowed.