Try this plugin this fixes similar issue of 404 which category pagination : http://ww.wp.xz.cn/extend/plugins/category-pagination-fix/
When you use /%category%/%postname%/ as permalink
The plugin is tested up to WordPress 3 and found working. Post me if any issues are there. I cant check on older wordpress than 2.9 coz I dont have files. Really sorry about that.
I fixed the same issue on my blog and updated as a plugin for everyone.
Grab here http://ww.wp.xz.cn/extend/plugins/category-pagination-fix/
