Just got it running myself. I had this error (combined with the Auto mode claiming that the database didn't exist.)
Three things that helped:
1) Extracting the zip file on the server itself.
2) Deleting the entire directory and replacing it with fresh files on each failed attempt.
3) formatting the connection strings thusly:
<connectionStrings>
<add name="SiteSqlServer" connectionString="Server=.\sqlexpress;Database=dnn;uid=user;pwd=pass" providerName="System.Data.SqlClient" />
</connectionStrings>
<appSettings>
<add key="SiteSqlServer" value="Server=.\sqlexpress;Database=dnn;uid=user;pwd=pass" />
(very important not to tack an extra semicolon on the end of the connectionString.)
Hope this helps,
-Jeff