I'm experiencing a very similar problem. The response I'm getting after wiring the configuration as depicted; selecting the "Arduino Duemilanove w/ ATMega 328" option from the "Board" item under the "Tools" menu; selecting the "Arduino as ISP" option under the "Programmer" item under the "Tool" menu; and then selecting the "Burn bootloader" item is:
avrdude: stk500_recv(): programmer is not responding
Back to yet a third or four check of the wiring configuration I daresay; or a bung ATMega 328 chip. The Arduino Duemilanove is working AOK standing alone.