newbie problem: ActiveRecord::StatementInvalid

Please,
I am just beginning to learn RoR, following the "Up and running"
tutorial.
setup: ruby and ror=latest; mysql 4.0.17; WEBrick.

#Created the app I had to add the -d mysql after looking in the forums,
latest RoR does not defaults to mysql

rails -d mysql \chapter1

(MySQL)
create database chapter1_development;
grant all on *.* to 'ODBC@localhost';

ruby script/generate controller Greeting

At this point I should see at localhost:3000/greeting something like
"an error message telling you that index is an unknown action." (the
tutorial says)
Instead I see this:

ActiveRecord::StatementInvalid in GreetingController#index
Mysql::Error: Unknown system variable 'NAMES': SET NAMES 'utf8'

This is the response I get for EVERY request, even
localhost:3000/rails/info/properties.

MySQL complains about an unknown system variable, NAMES. I searched the
mysql docs, hoping this variable would be present in later versions of
MySQL; so upgrading the database would solve the problem. But this
variable is nonexistent, in any version of the database.

So what's going on?

Thanks to all

does this help:
http://www.sugarcrm.com/forums/archive/index.php/t-14604.html

a lot of people seem to have the same problem and a solution is
suggested....

ps I just googled for: Mysql::Error: Unknown system variable 'NAMES':
SET NAMES 'utf8' (not between speech marks and the above was top of the
list baby yeah!

I also faced the same error. Mysql::Error: Unknown system variable
'NAMES': SET NAMES 'utf8'
I found that in the config\database.yml file there is a line encoding:
utf8
I solved this error by removing the line encoding: utf8 from the file
config\database.yml file. Do this for development, test, production
settings.
It worked for me.

-Rohit

I have explained the solution in details on my blog http://rohitagarwal24.blogspot.com/
Rohit