I have not personally done combined shipping, so will guess at the correct procedure (after consulting someone who has): In addition to the above instructions regarding multiple quantities when INDIVIDUAL ITEMS is checked (as opposed to LOTS), there is an additional box which was not mentioned, and must be checked to set up your combined shipping policy . In the 'Shipping Tools' section under 'Options' there is a box marked 'Make this item eligible for a shipping discount according to my eBay preferences'. Checking this box, as well as the box below that, under 'Combined Shipping Discounts' and marked 'Apply my eBay promotional shipping rule' should work. Make sure you set up your ebay preferences as noted above. Note: If you are selling your items as a Lot, and mark the 'LOT' option, you should not get an error message, as it would no longer apply.
If you still can't get things to work, I would file a support request from the Help page.