I had this same problem and for me it was a problem with the installation of the hgadmin repository. When I installed the package, I got errors from python saying the mercurial package wasn't installed. I assume that happened when mercurial-server tried to initialize the hgadmin repository. So when I went to checkout the hgadmin respistory, there was no .hg directory:
root@myshost:/var/lib/mercurial-server/repos# cd hgadmin/
root@myshost:/var/lib/mercurial-server/repos/hgadmin# ls -a
. ..
In order to resolve this, I did:
easy_install mercurial
sudo apt-get purge mercurial-server
sudo rm -rf /var/lib/mercurial-server
sudo apt-get install mercurial-server
And then continued on with the directions here:
http://kurtgrandis.com/blog/2010/03/20/gitosis-for-mercurial/