Strange, I run squeeze also, notification daemon works fine here, I can 
toggle it on and off at will (sometimes for me it can be a nuisance)

The file in question seems to be ~/.trinity/share/config/kdedrc

Here is mine:

[$Version]
update_info=kded.upd:kde3.0

[Module-homedirnotify]
autoload=true

[Module-knemod]
autoload=true

[Module-kwrited]
autoload=true

[Module-mediamanager]
autoload=true

[Module-medianotifier]
autoload=true

[Module-remotedirnotify]
autoload=true

[Module-systemdirnotify]
autoload=true

Are other files in .trinity getting updated normally? You can tell by 
the date stamps using ls or konq in detailed list mode