After a bit more playing around I can get this to work - although it still acts strangely.
If, from the Save As dialogue box in ACR I click on "Select folder" and navigate to a new folder then press "Select" , the Save as dialogue re-appears but without any folder path shown. If I try and save the image at that point I get the error message.
However if instead of trying to Save the image I re-click on "Select Folder" and then click on "select" again, without changing anything, then the Save As dialogoue box re-appears but this time with the new folder path shown. If I now save the image it works.
Strange behaviour - but work-able.
If it helps , I am using CS5 (12.04), ACR 6.7 on a 32-bit Vista system with SP 2
Seems to me problems have been reported with the Save in New Location feature for quite a while - going all the way back to the first release of CS5 as I recall, if not before. I don't ever recall anyone getting to the bottom of what's going on (though of course I could have missed it).
I think the fact that you've found a workaround is great. Assuming someone from Adobe takes another look at the software with this issue in mind, your workaround could very well give them critical help with their investigation.
As you say, hopefully this will help get to the root of the problem. In the meantime at least I can once again save a set of images as a group direct from ACR without having to open the images in Photoshop and use Save As on each image from there, which is what I originally ended up doing as a workaround.