problem fixed by modifying the code in the wiki to this:
location /joomlasubfolder/ {
error_page 404 = @joomla;
log_not_found off;
}
location @joomla {
rewrite ^/(.*)$ /joomlasubfolder/index.php?q=$1 last;
}
Posted at Nginx Forum: http://forum.nginx.org/read.php?2,98800,98806#msg-98806