Kubuntu 11.10 with encrypted root upgraded to 12.04 result in unbootable system

[bastafidli]

I have perfectly working Kubuntu 11.10 system. The machine is Dell Precision T5500 with the following disks
/dev/sda 164 GB
- dev/sda1 - primary - Windows XP
/dev/sdb 1TB
- /dev/sdb1 - primary - Windows 7 system partition
- /dev/sdb2 - primary - WIndows 7 OS
- /dev/sdb3 - primary - Kubuntu 11.10 /boot partition
- /dev/sdb4 - extended partition
- /dev/sdb5 - logical LUKS encryption partition mapped to / (root)
- /dev/sdb6 - logical LUKS encrypted partition swap

After online upgrade to 12.04 which went without any issues I rebooted the system. I was presented with GRUB menu which correctly listed
- Ubuntu 12.04 with latest 3.x server
- Previous Kernel versions
- Window 7
- Windows XP

Regardless with option I choose I receive 3 errors
- no such partition
If I drop to Grub console and I try to do ls I receive error
- no such partition

When I reboot to Ubuntu or Kubuntu alternative CD and try to do rescue
It correctly detects all my partitions, asks for passwords for /dev/sdb5 and /dev/sdb6 and unlocks them
If I try to to grub reinstall I receive error it cannot reinstall it
If I try to chroot to /dev/mapper/sdb5_crypt I get a working shell
If I try to do grub-install I get error that is cannot find mapping for /dev/mapper/sdb5_crypt to GRUB DISK
If I try to do grub-probe as suggested by grub-update I get error that it cannot find mapping for /dev/mapper/sdb5_crypt and to check my device.map file
If I try to run grub-devicemap it maps only /dev/sda and /dev/sdb but not /dev/mapper/sdb5_crypt
If I try to modify device.map file manually it doesn't work
If I try to do update-grub I get reference that GRUB doesn't understand LUKS encrypted volumes and look at bug http://bugs.debian.org/491977. It also creates new grub.cfg file which has only entry for Windows XP and WIndows 7 but not to the current Linux installation I am actively using

At the end I am unable to fix the system since grub doesn't allow me to update the boot sector to bootable system. I had to reinstall.

[Launchpad Janitor (janitor)]

Status changed to 'Confirmed' because the bug affects multiple users.

[bastafidli (ubuntu-bastafidli)]

Also logged as
https://bugs.launchpad.net/ubuntu/+source/grub2/+bug/997414
against GRUB since it seems to be GRUB limitation.