I have just test with hgserve and it works well. So must be a problem with
hgwebdir.cgi somewhat (or my Apache configuration, which I hope not...).

I have not tested with hgweb.cgi alone. Should I?

Just one thing, I have also tested with mercurial library from previous
version (hgwebdir_mod.pyc dated 2/Aug/2009) and the same happens. For your
info, I have run this test with Mercurial v1.4 executables installed, so
maybe it is not a valid test.

I have Python 2.5.4 installed in C:\Python25
And uncompressed mercurial.zip file (using 7zip) bundled with Mercurial v1.4
installable into C:\Python25\Lib\mercurial

If I can help with some other tests, please let me know.