Update: after some internet and support research, I was finally able to fix the Apple ID problem!
It seems the issue traces back to setting up a new iPhone 4S and signing up for iCloud in the process a couple of weeks ago..
It seems it was a conflict of email addresses, associated with both the origianl Apple ID and the new iCloud account (iCloud orces you to set up a new account, since only email address Apple IDs work on iCloud).
Anywasy, found this workaround fix online: http://www.youtube.com/watch?v=OAu0TMFmf50
- finally, no more endless loop of email verifications & wrong passwords!
Thanks, Iconic HD!