Yes I did upload archive in same folder as Joomla.start.php and picked it from second list. I did procedure correctly. What is weird is that Joomla archive file has become corrupted - it "shrinked" after starting Joomla.Start.php to around 200KB, and yes, I have checked it was OK prior to I started installation (actually I did this two times to be sure).
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I have solved problem using manual upload in appropriate folder and choosing option "direct installation". Only if I use FTP installation I get error previously stated. Now life will be much easier
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