My initial import of the RAW pictures is done in the Olympus Master 2 program My camera is an E620 (Olympus) I use LR 3.6 on an XP PC and then export the picture to a Windows map from where it is picked up by Picasa. PS (CS2) is only used for finishing touches or possible special effects after exporting from LR as a jpg as it does not recognize my camera's RAW format. Picasa is mainly used for the little commodities like resizing, sometimes mailing and a few others like preparing a selection in the blue albums - but also to have an overview of my extensive picture volume.
I had not tried DNG yet so seeing this post I exported a picture from LR to a map and had a look at it in Picasa - and indeed.. it looks terrible! Another strange thing is that none of the corrections I had applied in LR is shown...
Next step I opened the dng file in my antique CS2. It loses a bit of quality there but nothing like the picture I see in Picasa. The changes are shown together with the original as a greyish transparant in the background as a possibility to change back.
So I think I must agree with Rinus that the problem is indeed in Picasa itself... Let us hope the Picasa guys will do something about it some time in the future?