ubuntu server 10.04 nginx 404 errors

What I am trying to do is setup a web server for development running in VMware with the IP address of 192.168.190.128. Nginx is installed and running and I get the "welcome to nginx" page.

However when I create a subfolder in "var/www" and try to hit "http://192.168.190.128/subfolder" I get a 404 Not found error. The files are owned by www-data, and nginx is running on that account also so I dont think its a permissions issue.

Here is my nginx configuration.

user www-data;
worker_processes  4;

error_log  /var/log/nginx/error.log;
pid        /var/run/nginx.pid;

events {
    worker_connections  1024;
    # multi_accept on;
}

http {
    include       /etc/nginx/mime.types;

    access_log  /var/log/nginx/access.log;

    sendfile        on;
    #tcp_nopush     on;

    #keepalive_timeout  0;
    keepalive_timeout  65;
    tcp_nodelay        on;

    gzip  on;
    gzip_disable "MSIE [1-6]\.(?!.*SV1)";

    include /etc/nginx/conf.d/*.conf;
    include /etc/nginx/sites-enabled/*;
}

Here is the default server config in sites enabled:

server {
    listen   80 default;
    server_name  localhost;

    access_log  /var/log/nginx/localhost.access.log;

    location / {
        root   /var/www/;
        index  index.html index.htm index.php;
    }

    location /doc {
        root   /usr/share;
        autoindex on;
        allow 127.0.0.1;
        deny all;
    }

    location /images {
        root   /usr/share;
        autoindex on;
    }

    #error_page  404  /404.html;

    # redirect server error pages to the static page /50x.html
    #
    #error_page   500 502 503 504  /50x.html;
    #location = /50x.html {
    #   root   /var/www/nginx-default;
    #}

    # proxy the PHP scripts to Apache listening on 127.0.0.1:80
    #
    #location ~ \.php$ {
        #proxy_pass   http://127.0.0.1;
    #}

    # pass the PHP scripts to FastCGI server listening on 127.0.0.1:9000
    #
    #location ~ \.php$ {
        #fastcgi_pass   127.0.0.1:9000;
        #fastcgi_index  index.php;
        #fastcgi_param  SCRIPT_FILENAME  /scripts$fastcgi_script_name;
        #includefastcgi_params;
    #}

    # deny access to .htaccess files, if Apache's document root
    # concurs with nginx's one
    #
    location ~ /\.ht {
        deny  all;
    }
}