Nope, blog referenced with /blog/%postname%/ to the regular post-type that came with the wordpress installation and blog-2, blog-3… (names are for example only!) are registered custom_post_types. I refresh the permalink structure unsuccessfully more than once after registering the custom_post_types in my functions.php.
How many post types are you registering?
I do not know yet but if it works only with one custom_post_types, i can rule the world with thousands of separate blogs ??
cheers