issue will be how you plan to encrypt and then decrypt the data ? gets into the area of "encryption technology.." rather than an elgg issue. besides if you get hacked and they can get to your settings.php ! you are pretty much dead !!

Yes, and the encription will require a ELGG core hack. But, BTW, you must store the encripted key in a place. Is not safe, at all.

+ Ideally.. you will need a very good robust 2-way encryption algorithm (might I suggest "Rijndael"?) 

Dhrup: Yes. A basic public/private key concept. But I don't see an easy solution in PHP world. In Brazilian Stocks Exchange we developed a database connection class where you setup only the name of database. The connection string was stored in another place and encripted. The developers and the administrator doesn´t have access to database login. But we talking about a enviroment where safety is REALLY needed. :)

Is it feasible to relocate the settings file? 

e.g. outside of document root, like the data folder is.

Would this increase protection?

@Roger, that seems to be the most viable solutions, various other sites were suggesting that method.

I assume there is no elgg specfic solutions.?

Hit the settings file directly. What shows up? Nothing. What are you trying to protect against?