I think I understand what you are trying to do. Basically, you want the blog to be shown as normal, but just linked to through the navigation instead of being the main page, right?
If that is the case and you are using WP 2.7 then it will be pretty simple. Create a new page and name it anything you want. I chose “blog” to keep it simple. Keep the content blank. Publish the page.
Then, go to Settings > Reading. You should have already gone there to choose the static page. Keep the front page choice the same. For the posts page (i.e. your blog), choose the new page you just created (in my case, “blog”). That will give you the blog you desire in chronological format.
Hopefully, I answered your question.