If you have the exact same symptoms (an HTTP 500 / internal server error)... Then you will need to check the server error logs (may need to contact your hosting provider as not all provide direct access to the Apache server error logs).
If you have a different symptom (it sounds like you do), please elaborate. Is the phpinfo() output exactly the same for both the live and demo store? What are the physical paths for the live store and demo store? Is the .htaccess file in a "parent" folder shared by both stores or is one store "nested inside" the other? If so have you altered the .htaccess file(s) accordingly?
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