Yes works fine on the command line.
Also do you know where Kmail expects to find PGP/GPG?
The manual/settings doesn't say anything about
the location, so I'd assume that the executables
in the path are fine, and keys in ~/.gnupg (in my
case, I'd assume it finds them in your ~/.pgp, too),
the only thing I can think of is that you did create
your keys, but the trusts/signatures aren't done yet.
If this is the case KMail refuses to use them.
Is GPG similar to set up with Kmail as PGP?
All you do is generate your keys (trusts and all)
and then select GPG in KMail's security settings.
Works like a charm.