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When setting the Grails home directory in the Options window, it rejects it if you select the install dir. This is strange, because the install dir is what is used in the GRAILS_HOME environment variable. I'd suggest accepting the user's selection of the install dir and automatically converting the selection to the grails subdir.
Closing as WORKSFORME. The problem was probably fixed during the last few releases, but don't know the exact changeset.