I seem to have a very similar problem, although it occurs on both
graphical and recovery mode.

After recovery mode drops to busybox shell I can then manually type:

cryptsetup luksOpen /dev/sda1 root

enter the password
exit busybox

And then it resumes booting fine.

My system is upgraded from jaunty rather than a clean karmic alpha
install.

-- 
cryptsetup does not ask for password during graphical boot on karmic
https://bugs.launchpad.net/bugs/401063
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