Do a long list of your root directory; i.e.,
directory should be
drwxr-xr-x 70 root root 5904 2008-03-24 16:47 etc/
That is, mode 755. If it isn't, there's your problem.
file should be as you have stated.
The only other thing that might -- might -- be a problem is if something in /etc/profile
is not public readable or public executable. Look at the file and check the permissions of anything that executes (surrounded by ``).