Object Not Found

Hi,

I have recently installed wordpress on my server and everything is going ok except a problem with the permalinks.
If I use anything other than the default it does not work.
I have the rewrite mod installed.
My /etc/sysconfig/apache2 file contains:
APACHE_MODULES="actions alias auth_basic authn_file authz_host authz_groupfile authz_default authz_user authn_dbm autoindex cgi dir env expires include log_config mime negotiation setenvif ssl suexec userdir php5 rewrite ruby python headers"
In my httpd.conf I have the lines:

<Directory />
    Options FollowSymLinks
    AllowOverride All
</Directory>

<Directory /srv/www/htdocs>
    Options FollowSymLinks
    AllowOverride All
</Directory>

The .htaccess file wordpress generated is:

# BEGIN WordPress
<IfModule mod_rewrite.c>
RewriteEngine On
RewriteBase /
RewriteCond %{REQUEST_FILENAME} !-f
RewriteCond %{REQUEST_FILENAME} !-d
RewriteRule . /index.php [L]
</IfModule>

# END WordPress

Clicking on any link says Object Not Found and the error log shows
[Mon Apr 13 16:39:10 2009] [error] [client 77.96.189.19] File does not exist: /srv/www/htdocs/tag, referer: https://robdavey.homelinux.com/

Where am i going wrong :S

Any help is much appreciated. Thanks in advance.