I've had exactly the same problem. I have 3 PCs running 7.04. One of
them has the default installed kernel 2.6.20-15 and is fine, the other 2
have been updated immediately on being installed  to 2.6.20-16 and both
have the problem with fusermount. The fix outlined above does work but
it is not persistent; the problem is there again on rebooting. I added
the chgrp fuse /dev/fuse command to the /etc/init.d/fuse shellscript and
that has done the trick for now. I can't find any relevant differences
between the PC that doesn't work as expected and the 2 others except the
kernel version.

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fusermount: failed to open /dev/fuse: Permission denied
https://bugs.launchpad.net/bugs/114212
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