Does Bluetooth tethering not work, or am I doing it wrong? I carry two Android devices: my Nexus S phone, and a Nexus 7 tablet (both running Android 4.1 "Jellybean").  The tablet has Wi-Fi, but no cellular radio; so in order to use the Internet with it when there's no Wi-Fi hotspot nearby, I have the phone set up for Wi-Fi tethering: it effectively becomes a Wi-Fi hotspot, and the tablet uses that for Internet access.  This works perfectly.

However, I recently discovered what appears to be an alternate method of tethering: Bluetooth.  Both devices have menu options that seem to allow it; here's screenshots of how I configured both devices:

 
Options on Phone and Tablet (click images for larger variants)

I tested this by turning Wi-Fi off on both devices, then opening the browser on the tablet and refreshing the page that happened to be loaded.  I saw a message that said

    Unable to connect to the Internet


I was, of course, hoping to see the page reload.

It's a shame that I cannot get this to work, because it promises one advantage over Wi-Fi tethering: easier security.  I want to prevent other people from stealing my bandwidth; with Wi-Fi, this requires that I set up a WPA password, and then get that password onto the tablet somehow (which is quite tedious).  But with Bluetooth, all that's required is that I "pair" the devices, which I've already done.

So I am wondering if I'm doing something wrong, or if this feature simply doesn't work.
Maybe this is too late for some of you but this is a solution for Android 4.2:

Basically you need TUN module since the standard configuration does not include it:
Google Play - TUN.ko installer

Bluetooth thethering - fix solution