Ecryption best practices (server side, client side, password handling)?

Dear group,

I want to extend a GWT/GAE application by offering the option to
encrypt information entered by the user on client side in the
database. The goal is to increase trust when storing potentially
sensitive data, e.g. to prevent that people who have access to the DB
(like me) have read access to the stored information.

For client-side encryption using GWT I found this post:
http://www.mooreds.com/wordpress/archives/000529

However, others do not even recommend to compute password hashs on the
client and propose to do that on the server:
http://www.owasp.org/index.php/Hashing_Java
http://stackoverflow.com/questions/1238628/md5-hash-for-password-string-in-gwt-gwt-ext
http://stackoverflow.com/questions/695813/how-could-you-encrypt-user-data-so-only-they-can-decrypt-it

From user's perspective, I would not be comfortable with transmitting
my data unencrypted to the server (even using HTTPS), as the server-
side may for example log my information (and my password!). Especially
for the password-part I would feel unconfortable, as many people tend
to reuse their passwords (please no discussion about this :-)).

Currently, I see two options:
a) Encrypt and decrypt the information on the client using JS/GWT.
Pro: The password never leaves the browser, the unencrypted
information never leaves the browser. Con: Depending on the size of
the data the encryption/decryption may be slow; if loaded via HTTP,
the JS code may be compromised, etc.
b) Encrypt and decrypt the information on the server. Pro: Fast. Con:
The information is transmitted unencrypted.

What would be your recommendation?

In case of server-side encryption, would it make sense to hash the
password on client side and to use the hash to encrypt/decrypt? Or
would that be a no-go?

What happens if the user forgets his/her password? All data lost, I
guess?

I have no deep practical experience with cryptography, so I would
appreciate any suggestions or pointers to resources in the web. My
goal is not to have a bullet proof solution for highly sensitive
information, but it should be an improvement compared to the current
implementation (no HTTPs, no encryption).

Thanks
Sven

PS: x-post Google App Engine for Java, Google Web Toolkit

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