Safari will not let me delete saved passwords
I don't typically use Safari's password storage, but I just tested it, and I got the same results (also on 10.7.4).

What you can do as a workaround is open up Keychain Access, and in the search box, tip in "Web form password". That should show you all the passwords Safari has stored, and you can delete them there. Re-open Safari Preferences to double-check you got them all, but that should do the trick.