I haven't got .NET 3.5 here at the moment, but I installed connector 3.51 and ran it fine with ASP.NET 2.0. I don't see having MySQL bundled with PHP as being an issue.
There are two things you could try.
A
post here suggests that you may not need the Driver={MySQL ODBC 3.51 Driver}; part, but I'm not sure if that will fix it.
A better idea would be to download the new MySQL driver written specifically for .NET 3.5. You can
download it here and see the
docs here.
Phil