There shouldn't be a problem with SEO URLS or installing to a /shop/ folder. All paths are relative so you should be uploading googlefroogle.php to /shop/ and all other folders to there relative locations as well.
You have the same MySQL version as I do, so I am not sure what the error is. Please completely uninstall the script by running the uninstall.sql. Then upload all of the 1.5.3 files overwriting any existing files and then reinstall the googlefroogle.sql file by copying and pasting. Let me know how it goes.
Yes, you can create a php.ini and place it in your store's root directory.
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