PGDATA not accessible; please fix the directory permissions ($PGDATA should be world readable)

postgresql 8.4.8 64 bit /Ubuntu 10.4 64 bit

When I try to connect to postgresql from a local user on the same
machine that postgresql is running on I receive the following:
psql
Error: /pgdata/data is not accessible; please fix the directory
permissions (/pgdata/ should be world readable)

whats even worse if I try to connect to postgresql using localhost I
get the same problem
psql -h localhost -p 5432 -d DB -U user1
Error:/pgdata/data not accessible; please fix the directory
permissions (/pgdata/ should be world readable)

I dont have this problem from the local postgres account nor do I have
any problem connecting to the database remotely using TCP/IP.

If I change the unix_socket_directory setting to /tmp I get the
following error when I try to log on locally from postgres

psql: could not connect to server: No such file or directory
Is the server running locally and accepting
connections on Unix domain socket
"/var/run/postgresql/.s.PGSQL.5432"?

Not sure what is going on.

pg_hba
# "local" is for Unix domain socket connections only
local all all ident
# IPv4 local connections:
host all all 127.0.0.1/32 md5
host all all 192.0.0.0/8 md5