For any users still having other problems after trying this solution. Here’s a solution that worked for me.

I also assigned 13 character WEP password (using characters 0-9 and a-f
only) and this did fix my connectivity a few weeks back. However, today,
the windows machine, which connects to my mac’s 3G internet connection,
which is by way of USB Dongle, stopped working again.
I went through the procedure mentioned above on both machine’s, but still couldn’t connect.

I checked to see if I could browse with my iphone, also connected wirelessly. Same problem. Which now pointed to the Mac being the culprit and not the win7 settings I’d entered.

It then occurred to me that I should check the network settings
(System preferences/Internet and wireless/Network) on my Mac, which was sharing the internet, to see what was
connected to the internet. I noticed that ethernet(en6) was connected to
the internet (which must have been my 3G USB dongle) and airport was on
but had a self assigned IP address and could not connect to the
internet.

So I first tried to renew Airports DHCP but still couldn’t
connect. So I set DHCP manually using self assigned IP address. The IP
address for the ethernet(en6) connection that did work was 197.66.215.75
so I used 197.66.215.76 for Airport. This confirmed that airport was
now connected to the internet.

However, same problem, neither iphone, nor win machine could connect to the internet.

I then went back to the internet sharing menu and played around with
“share your internet connection from” in my case it was ethernet(en6). I
changed it to airport and tried to connect but same problem, no
connection. After cycling through the various connections I could share
from, I went back to Ethenet(en6)

Oddly enough this fixed the connection problem and now iphone and winmachine can connect to the internet again.