Sorry. Forgot to add, rebooted after

 $ rm -r .gconf* .gnome*

All custom settings lost of course (background, fonts, etc),
desktop_is_home_dir still unchecked, but nautilus still shows ~/ as
desktop.

Sorry for the 2nd post.

Any workarounds?

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nautilus does not respect desktop_is_home_dir setting
https://bugs.launchpad.net/bugs/273946
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