what version of php?
the mysql_set_charset command wasn't introduced until version 5.2.3.
We updated power gallery to force the db to use the UTF8 character set to address a problem people where having when trying to store special characters in the image description.
you can get around the error by going to Connections/powergallery.php and Install/scripts/connection.php and changing line 10:
but if you try to use special characters in the image description, you will run into issues.