Works just fine for me.
app.js
var express = require('express')
, app = express.createServer();
app.use(express.static(__dirname+'/public'));
app.listen(8080, "127.0.0.1");
mkdir public
cd public
touch README
README
test
$ curl http://localhost:8080/README
test
$ npm ls
connect@1.6.1
express@2.4.4