Suggestions

Review System Preferences

Create another user.

Log in as that user.

Use the Security & Privacy pane of System Preferences. In the FileVault tab, click Enable Users… then in the sheet, ensure that all required users are enabled.

Hint

System Preferences may show that FileVault is enabled, with a recovery key, when there is encryption with Core Storage, but neither FileVault 2 nor a recovery key. I reported this bug to Apple a while ago.

Similarly, but not the same bug:

• I assume that System Preferences may show FileVault disabled on a system where most elements of FileVault are enabled.

Thorough application of Disk Utility

Ensure that the utility is applied:

• to the logical volume group, which appears to contain the logical volume.

(Where Core Storage is used, Disk Utility in 10.8 can not show the physical disk.)

If you select the LV alone, then verification will omit the partition map.

Observations

Conversion Status: Failed

If encryption was applied when the volume was created (typically: erasure with Disk Utility) then:

• there was no conversion forward
• conversion backward can not begin.

Conversion Direction: backward

This implies that:

• recently, conversion backward did begin
• previously, the logical volume was the result of conversion forward (not the result of erasure with Disk Utility).

diskutil coreStorage encryptVolume 4FDED44E-EC4B-4B11-9FF5-9C958BD8CEAB

That could apply if logical volume 4FDED44E-EC4B-4B11-9FF5-9C958BD8CEAB was not encrypted.

As the LV is already encrypted, the response from diskutil is correct.

The question in Apple Support Communities

From the opening poster:

• Cannot enable FileVault

Does the resolution there in ASC, the bounty here in Ask Different, mean that Dennis continues to seek a more detailed answer, a better resolution?

Code -69755

-69755 appears in another discussion:

• FileVault failed and now I can't turn it off.

Interpreting the failure

Pessimistically but realistically:

• a failure to convert – with conversion of nothing – may indicate media failure, possibly in or around the area occupied by the extents file.

Yes, you can. Be sure to have a full Time Machine archive on an external device before you begin, and check your MBP meets the minimum system requirements before you buy. The Mountain Lion installer will create Recovery HD, if it doesn't already exist.

In case you choose to do a clean install, which is quicker, import your account afterwards from the Time Machine archive using Migration Assistant: you can pick and choose exactly what you want to import from the archive, and the Apple utility will sanitise imported user preferences so they are Mountain Lion compatible.

Alternatively, if you are comfortable using Terminal, Lloeki's answer to How can I create or recreate a Lion recovery partition has much to recommend it.