There is a bug in system.module which caused Drupal 4.7.0 beta 4 to reject password changing according to array functions. This bug has been discussed in http://drupal.org/node/46759. The patch is available right now.

=== modified file "modules/system.module"
--- modules/system.module       
+++ modules/system.module       
@@ -68,7 +68,7 @@ function system_elements() {
     "#value" => "pass",
     "pass1" => array("#type" => "password", "#size" => 12, "#maxlength" => 24),
     "pass2" => array("#type" => "password", "#size" => 12, "#maxlength" => 24),
-    "#validate" => array("password_confirm_validate" => ""),
+    "#validate" => array("password_confirm_validate" => array()),
   );
   $type["textarea"] = array("#input" => TRUE, "#cols" => 60, "#rows" => 5);
   $type["radios"] = array("#input" => TRUE, "#process" => array("expand_radios" => array()));