Sounds like you've got the headset parts assembled wrong somehow - a bearing retainer upside down is a good guess, or maybe a seal is in between two moving parts, or there's something missing. Find an exploded diagram of your headset and double-check everything. Make sure that, if the top and bottom bearings are different, you haven't mixed them up.
Also, check to make sure the top cap isn't bottoming out on the steerer tube when you tighten it.