Sorry to bring bad news, but I have been having exactly the same problem with trying to use American Express on PayPal for several months now. Every time I get the "You cannot use this card to pay for this transaction" message. I have spoken to PayPal on the phone at least a dozen times and almost every time get a different response. The only duplicate answers I've gotten is that the transaction fits some "security model" that PayPal has so they are blocking the sale and there is nothing they can do for me. What I think is really going on is PayPal doesn't want to pay fees to American Express, so they are blocking use of their cards. I won't give PayPal access to my bank account, so they don't want my business. Don't be surprised if you continue to get the message when you try to use American Express.
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