From: http://forums.whirlpool.net.au/forum-replies-archive.cfm/813573.html
Think about what your rewrite rules mean. They are saying: if /folder1 or /folder2 appears anywhere in the URI, stick drupal/ onto the front.
So say somebody goes to /folder1/page. Apache rewrites that to /drupal/folder1/page (assuming your RewriteBase is /), then it does an internal redirect. So now Apache has got the URI /drupal/folder1/page. Apache rewrites that to /drupal/drupal/folder1/page, then it does an internal redirect. And so on.... Apache gives up after a set of number of internal redirects. Read more »