I seem to have a very similar problem, although it occurs on both graphical and recovery mode.
After recovery mode drops to busybox shell I can then manually type:
cryptsetup luksOpen /dev/sda1 root
enter the password exit busybox
And then it resumes booting fine.
My system is upgraded from jaunty rather than a clean karmic alpha install.
I seem to have a very similar problem, although it occurs on both graphical and recovery mode.
After recovery mode drops to busybox shell I can then manually type:
cryptsetup luksOpen /dev/sda1 root
enter the password
exit busybox
And then it resumes booting fine.
My system is upgraded from jaunty rather than a clean karmic alpha install.