I can't confirm this bug on an up-to-date version of Karmic. I used to have
some problems with it, but they are fixed now.
It could have something to do with the XDG Dir settings, could you please
attach ~/.config/user-dirs.dirs with and without desktop_is_home_dir enabled?
The ~ stands for your home directory, directories with names starting with a
dot, like .config, are hidden by default, so they won't be visible in Nautilus.
You could show the hidden directories with the short-cut Ctrl+H or by toggling
File->Show Hidden files. Thanks in advance.
** Changed in: nautilus (Ubuntu)
Status: New => Incomplete
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Can't create file/directory on desktop using right mouse button menu if
desktop_is_home_dir
https://bugs.launchpad.net/bugs/420488
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