In case it's of any use to anyone else (using Squeeze as a Xen host),
the temporary fix is to edit:
/usr/lib/xen-4.0/bin/pygrub
and add these two lines:
output_directory = "/var/run/xend/boot"
not_really = False
at line 646 in the file (just after several other lines in a similar vein).
Doubtless a fixed Debian package will be along very shortly.
Cheers,
John