Sorry for delay, here is some evidence:

[pdutta] ac4-devmysqldb-001 /home/y/var/mysql/backups $ sudo -u mysql /home/y/bin64/xtrabackup --backup --target-dir=/home/y
/var/mysql/backups
Password: 
/home/y/bin64/xtrabackup version 1.6.5 for Percona Server 5.1.58 unknown-linux-gnu (x86_64) (revision id: undefined)
xtrabackup: uses posix_fadvise().
xtrabackup: cd to /home/y/var/mysql/data
xtrabackup: Target instance is assumed as followings.
xtrabackup:   innodb_data_home_dir = ./
xtrabackup:   innodb_data_file_path = ibdata1:10M:autoextend
xtrabackup:   innodb_log_group_home_dir = ./
xtrabackup:   innodb_log_files_in_group = 2
xtrabackup:   innodb_log_file_size = 5242880
120329 14:13:44  InnoDB: Log file ./ib_logfile0 did not exist: new to be created
InnoDB: Setting log file ./ib_logfile0 size to 5 MB
InnoDB: Database physically writes the file full: wait...
120329 14:13:44  InnoDB: Log file ./ib_logfile1 did not exist: new to be created
InnoDB: Setting log file ./ib_logfile1 size to 5 MB
InnoDB: Database physically writes the file full: wait...
xtrabackup: Something wrong with source files...

and a grep of the /etc/my.cnf:

[pdutta] ac4-devmysqldb-001 /home/y/var/mysql/backups $ grep loose /etc/my.cnf
loose-innodb_use_sys_malloc
loose-innodb_log_buffer_size = 8M
loose-innodb_old_blocks_pct = 37
loose-innodb_mirrored_log_groups = 1
loose-innodb_max_dirty_pages_pct = 90
loose-innodb_rollback_on_timeout = off
loose-innodb_read_ahead_threshold = 56
# loose-innodb_locks_unsafe_for_binlog
loose-innodb_file_per_table
loose-innodb_additional_mem_pool_size = 8M
loose-innodb_stats_on_metadata = on
loose-innodb_log_group_home_dir = /home/y/var/mysql/iblog
loose-innodb_flush_log_at_trx_commit = 1
loose-innodb_doublewrite
loose-innodb_thread_concurrency = 0
loose-innodb_stats_sample_pages = 8
loose-innodb_io_capacity = 200
loose-innodb_table_locks = on
loose-innodb_thread_sleep_delay = 10000
loose-innodb_open_files = 300
loose-innodb_autoinc_lock_mode = 1
loose-innodb_concurrency_tickets = 500
loose-innodb_file_format = Barracuda
loose-innodb_flush_method = O_DIRECT
loose-innodb_read_io_threads = 4
loose-innodb_old_blocks_time = 0
loose-innodb_data_file_path = ibdata1:256M:autoextend
loose-innodb_force_recovery = 0
loose-innodb_sync_spin_loops = 20
loose-innodb_checksums
loose-innodb_stats_method = nulls_equal
loose-innodb_change_buffering = inserts
loose-innodb_max_purge_lag = 0
loose-innodb_log_files_in_group = 2
loose-innodb_buffer_pool_size = 128M
loose-innodb_lock_wait_timeout = 50
loose-innodb_commit_concurrency = 0
loose-innodb_data_home_dir = /home/y/var/mysql/ibdata
loose-innodb_replication_delay = 0
loose-innodb_adaptive_hash_index = on
loose-innodb_file_format_check = on
loose-innodb_strict_mode = off
# loose-innodb_adaptive_flushing
loose-innodb_support_xa = on
loose-innodb_spin_wait_delay = 6
loose-innodb_write_io_threads = 4
loose-innodb_autoextend_increment = 8
loose-innodb_fast_shutdown = 1
loose-innodb_log_file_size = 128M
loose-innodb_flush_neighbor_pages = 1
loose-innodb_log_block_size = 512
# loose-innodb_doublewrite_file
loose-innodb_adaptive_checkpoint = estimate
loose-innodb_extra_rsegments = 0
loose-innodb_checkpoint_age_target = 0
loose-innodb_ibuf_active_contract = 1
loose-innodb_dict_size_limit = 0
# loose-innodb_page_size
loose-innodb_read_ahead = linear
loose-innodb_stats_update_need_lock = 1
# loose-innodb_ibuf_max_size
loose-innodb_use_purge_thread = 1
loose-innodb_fast_checksum = 0
loose-innodb_use_sys_stats_table = 0
loose-innodb_ibuf_accel_rate = 100
loose-innodb_extra_undoslots = 0
loose-innodb_thread_concurrency_timer_based = 0

If I remove all of the --lose-options:
sed 's/^loose-//' /etc/my.cnf > /home/y/tmp/my.cnf
[pdutta] ac4-devmysqldb-001 /home/y/var/mysql/backups $ sudo -u mysql /home/y/bin64/xtrabackup --defaults-file=/home/y/tmp/m
y.cnf --backup --target-dir=/home/y/var/mysql/backups
Warning: /home/y/bin64/xtrabackup: ignoring option '--innodb_adaptive_hash_index' due to invalid value 'on'
/home/y/bin64/xtrabackup version 1.6.5 for Percona Server 5.1.58 unknown-linux-gnu (x86_64) (revision id: undefined)
xtrabackup: uses posix_fadvise().
xtrabackup: cd to /home/y/var/mysql/data
xtrabackup: Target instance is assumed as followings.
xtrabackup:   innodb_data_home_dir = /home/y/var/mysql/ibdata
xtrabackup:   innodb_data_file_path = ibdata1:256M:autoextend
xtrabackup:   innodb_log_group_home_dir = /home/y/var/mysql/iblog
xtrabackup:   innodb_log_files_in_group = 2
xtrabackup:   innodb_log_file_size = 134217728
xtrabackup: use O_DIRECT
120329 14:21:00  InnoDB: Warning: allocated tablespace 10, old maximum was 9
[01] Copying /home/y/var/mysql/ibdata/ibdata1 
     to /home/y/var/mysql/backups/ibdata1
[01]        ...done
[01] Copying ./foobar/foo1.ibd 
     to /home/y/var/mysql/backups/foobar/foo1.ibd
[01]        ...done
xtrabackup: The latest check point (for incremental): '51979'
xtrabackup: Stopping log copying thread.
xtrabackup: Transaction log of lsn (51979) to (51979) was copied.