Ok, thanks, that clears things up a bit. You have correctly configured the Payments Standard checkout. The Pay with PayPal button that you see at the top of the checkout form should not be there for this option. I have logged this as a bug so that it can be corrected.
If you can make use of the Express Checkout API I would suggest that you use that technique and get rid of the checkout form on the page. If you need to use Payments Standard and do not have the api credentials for the Express Checkout then you will need to remove the PayPal button and use only the checkout form.