The importer in WP2.2 should work with New Blogger, as it says in the Codex:
Importing Content « WordPress Codex
Is it that you previously installed wordpress in your domain root, and recently you move it to a /blog directory? If that's so, you have to change the Blog Address and Wordpress Address in your database. Login to your database, and browse wp_options table. It should be somewhere there.
Alternatively you can add this line to your wp-config.php:
Code:
define('WP_HOME', 'http://www.littlepenang.com/blog');
define('WP_SITEURL', 'http://www.littlepenang.com/blog');
Add this 2 line of codes and your directory information should be OK.