I've some problems with the connection from Word 2003 with Zotero plugin 1.0b4 and Portable Firefox 3.04 with Zotero 1.5 prev 3.4. I can't set any doc prefs for Zotero.
I have the exact same setup with the exact same problem. The error I get when clicking 'set doc prefs' is the uninformative 'An error occurred communicating with Zotero'. I doubt it's relevant (because I can insert refs in Word and all), but a sync operation is in progress currently.
This seems to be an error introduced with the newest Sync Preview version.
I would think you would be getting this after the communication error:
[JavaScript Error: "watcher is not defined" {file: "chrome://zotero/content/xpcom/integration.js" line: 802}]
This is fixed on the trunk, and we'll put out a 3.5 later today with the fix. You can safely switch to the trunk in the meantime, though you should switch back to 3.5 when it comes out before updating further (unless you want to live on the edge).
This seems to be an error introduced with the newest Sync Preview version.