Internal Server Error
The server encountered an internal error or misconfiguration and was unable to complete your request.
Please contact the server administrator, [no address given] and inform them of the time the error occurred, and anything you might have done that may have caused the error.
More information about this error may be available in the server error log.
The .htaccess is an Apache issue, doesn't have anything to do with web2py as such. Better said, it's not really an Apache issue either, as the .htaccess and Apache worked as expected, according to the instructions in the .htaccess.
You should be talking to whoever put the file there, as he/she obviously didn't want any pages to be accessible from anywhere under /var directory... What's the reason for this I can only guess.