sh: `-c' requires an argument

I ran into this problem when running almost any command using psql,
createdb or even trying to goto the shell using \!

The problem is that /bin/sh points to /bin/bash and my bash version is:
$ bash -version
GNU bash, version 1.14.7(1)

Here are the other errors:
$ createdb foo
PQexec() -- Request was sent to backend, but backend closed the channel
before responding.
This probably means the backend terminated abnormally before or
while processing the request.
createdb: database creation failed on foo.

(in the log file it has the "sh: `-c' requires an argument" error)

Has anyone run into this problem? Or could give me tips to fix it?

Thanks
Girish