Hmmm, been a long time since I've done a skeleton. I think it has something to do with not being set to world coordinates.
As for it stretching the mesh, you need to put a weight map or UV map on the leg. Call it "right leg". Then in bone properties tell the bone it can only affect the map "right leg". Otherwise, the bone effects points within it's sphere of influence and gets into conflicts with other nearby bones.
Oh! I just remembered the gimbal locked solution! In Layout, Setup tab, look under modify. With the bone selected, click on Orientation and Record Pivot Point. On your HPB input boxes at the bottom, set those to zero. Open the bone properties and look for the Rest Rotation button, click that and set everything to zero. While doing this, you're going to see the bone and leg flip out to an odd angle. But once you have rotation set to zero in both places, the bone goes back to it's rest position.
Also, look in the tutorials section for the Serenity tutorial. I helped Sean produce that pdf series and I added a chapter on rigging. That chapter tells you everything you need to know.