Why has paypal stopped working

[Rolig Loon]

The answer to that one hasn't changed.  To be a valid payment method for SL, your account has to be verified (yours is) and has to guarantee instant funds transfer (yours does not).  You can verify a PayPal account for use in SL, but if it is not backed up by a standard credit card (not a debit card or a prepaid card or a bank account) you will have to be very careful to keep a cash balance there.  PayPal can transfer whatever cash is already in your account with them, but it can't get money from a bank account or debit card fast enough to be instantaneous.

[Rolig Loon]

The answer to that one hasn't changed.  To be a valid payment method for SL, your account has to be verified (yours is) and has to guarantee instant funds transfer (yours does not).  You can verify a PayPal account for use in SL, but if it is not backed up by a standard credit card (not a debit card or a prepaid card or a bank account) you will have to be very careful to keep a cash balance there.  PayPal can transfer whatever cash is already in your account with them, but it can't get money from a bank account or debit card fast enough to be instantaneous.

[Lindal Kidd]

Answer to your addition:

As Rolig said, a PayPal account that is "verified" by linking to a Real Life bank account or a debit card WILL work, PROVIDED that you have enough cash actually in the PayPal account balance to cover your charges.  Linden Lab insists on instant payment, and they will not wait several days for money to transfer from your bank account to PayPal to them.