The Apple Keychain First Aid tool was no use. It just rejected the password continuously, just as did the Keychain Access application. Re-applying the 10.2.5 combo update did not resolve the problem. All the User folders and file permissions and user ID's were fine.
What I eventually found was that the system directory /var/tmp no longer existed. After creating this directory, as root user, Keychain access again functioned completely - even with the original keychain file.
YMMV, but this solved the problem on my system. However, I do now wonder what other gotcha's are waiting down the line with this restored system. System backup/restore is an application which requires total trust. And I notice that Dantz has a posting acknowledging this problem three weeks ago which they still haven't responded to.
BTW, the vi editor was also unhappy about this missing directory, and I found the missing directory due to a line in the system.log file complaining about not being able to place console.log in that location during the boot process.

