I just hit the same problem, and disabling the inotify extension resolved it.
But I'm thinking that maybe we should fix the error-reporting bug too:

diff -r 6dcbe191a9b5 mercurial/dispatch.py
--- a/mercurial/dispatch.py     Mon Aug 18 16:50:36 2008 -0500
+++ b/mercurial/dispatch.py     Sat Sep 06 19:36:25 2008 -0700
@@ -90,7 +90,7 @@
             else:
                 raise
     except socket.error, inst:
-        ui.warn(_("abort: %s\n") % inst[1])
+        ui.warn(_("abort: %s\n") % inst)
     except IOError, inst:
         if hasattr(inst, "code"):
             ui.warn(_("abort: %s\n") % inst)