The best idea that i woudl suggest is to install the portal without ms sql sever and then configure the web.config file. this would result less headache for you.
you can try using your computer name instead of localhost or even 127.0.0.1 which i think would be the best.
Here are the steps that you should follow if you are connectiing to MSSQL seperatly
===================================================================================
1. after installing the portal starter kit without the SQL sever support
2. run the Portal_CreateDB.sql script in Querry Analayser - file is in Setup folder in the destinatin folder
3. check whether the database is created with the tables and stored procedures
4 edit the web config file like this before which you shoudl no the password ans the user login name mostly it would be user name - sa and pw - 123 or blank.
<add key="ConnectionString" value="server=localhost;database=Portal;uid=sa;pwd=123;"/>
you can either use the localmachine name or just say localhost ot even 127.0.0.1 would do.
5. Run the application it should work. not have nay probs when working with Portal Starter kit.