You know, I've been using Audacity all this time and I never noticed that you could silence a section with the w|-|w thing
Well I've tried all those things and I can't reproduce the problem, but I think I'm using a much more recent version of Audacity. I'm using Audacity 1.3.9
Try upgrading to 1.3.9 and see if that fixes the problem. (the 1.2 version is really old now and can have some very strange problems on modern machines).