Check with your web host that you are entering all the required information correctly and in the right place.
Also don't quite understand what publishing to a local folder has to do with iWeb connecting to ftp successfully? The two are not related.
If you really can't publish your site through iWeb, then your only other option would be to publish your site to a local folder from iWeb and then use a dedicated ftp client such as Cyberduck to upload your site to your server.
See this page for info about publishing settings...
If the test connection works then its most likely that the problem is the Directory/Path.