multi-sites with wordpress 3.1.2 and nginx 1.0.1

I am having problem getting wordpress 3.1.2 with nginx 1.0.1
working with multi-sites via sub-directories. if i use apache2
instead of nginx multi-site sub-directories works fine.
I am using Linux Debian Lenny.

my root directory is
/var/www

wordpress install:

/var/www/wordpress

/var/www/wordpress displays the top level blog fine
but a subdirectory /var/www/wordpress/site3
comes back with: No input file specified.
below are my nginx configuration files.
At this point i can display sub-directories. again
all works fine using apache. also with nginx do we need the
.htaccess file.
I have tried the usual links for configurations but have had
no luck so far. what is going on here? what needs to be
done to get nginx to work with multi-sites?

thanks, Michael

here is my nginx.conf

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