It is interesting that you can read the files, but you can't duplicate the file. How much disk space do you have remaining?
So lets review. You have found the file. Renamed it. Fixed permissions via the Get Info tab. Done a Repair Disk Permissions using Disk Utility, Can look inside the folder and open jpgs.
Since you can see inside the folder, look for a file named index.xml.gz or maybe just index.xml. You mentioned iWeb thought that file was missing. I can't think of a reason why the file would be missing.
Have you removed the com.apple.iWeb.plist from your Library/Preferences folder, while iWeb is NOT running? After removing that file, try starting iWeb. What happens?
As for where to place the Domains.sites file. I'd duplicate it, which you are having a problem with right now. Then move it back to its default location, removing any sites file that is already there. I'm assuming this 1.59GB file isn't already there. Right click on the file and open it in iWeb.
The reason for the script I wrote was to make sure your user id information matches the owner ids for the domain files. If for any reason they are not the same, it could explain why you can't duplicate the file, but can read from it. this is related to you login.
Have you tried rebooting your Mac? If not, then do that too.