Common problems when enabling Search Engine Friendly (SEF) URLs
From Joomla! Documentation
Usually this has something to do with your host's settings. One solution that commonly works is to enter a value for the livesite variable in configuration.php. This must be manually entered.
Typically, it would look like this:
var $live_site = 'http://example.com';
But, if you access your Web site in a folder, it would be like this:
var $live_site = 'http://example.com/joomla';
- See Joomla! v 1.5 SEF URLs Scribd by Benjamin Hättasch which contains step-by-step instructions for installing and trouble-shooting your SEF URLs.