In grub.conf, try changing LABEL=/ to the real device name (e.g.
/dev/hda1) of your / partition. Something like:
kernel /vmlinuz-2.6.2 ro root=/dev/hda1
However labels work okay for me with the 2.6.2 kernel.
Bob...
I did try:
kernel /vmlinuz-2.6.1 ro root=/dev/sda3
but still the same ... :(
I don't know maybe something else is wrong. I keep digging.
Laszlo