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I've had the same problem during XOOPS install and configuration:
Could not connect to the database server.
I started using PHP5, Apache 2, MySql 4, XOOPS 2.0.9.2. and had no problems with Xoops. But, then I had problems getting xcGallery and XoopsGallery to work, so I downgraded PHP to PHP4.
PHP4 immediately manifested the "Could not connect to the database server" error from Xoops. So you can fix that error by going to PHP5. (Note: MySql is built into PHP4, but in PHP5 you must activate it. See
http://www.thriftyplaces.com/html/php_ini.html)
So, you can fix the database connection problem by going to PHP5, but then PHP5 might cause problems with other modules.
I, too, am still looking for the fix to make XOOPS connect to the database using PHP4.