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