Hi freelantz
Yes, I (eventually!) came to the same conclusion myself. I had to modify blog.php though to pass the paged parameter to query_posts, i.e.
<?php
/*
Template Name: Blog
*/
// Which page of the blog are we on?
$paged = get_query_var('paged');
query_posts('cat=-0&paged='.$paged);
load_template(TEMPLATEPATH . '/index.php'); //loads index
?>