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Looks like you don't have mod_rewrite enabled. Probably you're on Debian or Ubuntu which have a pretty modular Apache so you need to check if you actually installed the necessary module.
On CentOS there is a line like this in httpd.conf::
LoadModule rewrite_module modules/mod_rewrite.so
That line will load mod_rewrite and then 'RewriteEngine on' should work as well (assuming of course the module itself is installed).