Directory please, because it makes the URLs nice and hackable. I can hit Cmd+L, right, alt-backspace to remove the 'blog' part of the URL instead of screwing around trying to select the subdomain (and dot!) to get back to your main site.

I hate this even more for sites like GitHub pages, which use http://name.github.com/project/ for the pages and http://github.com/name/project/ for the repo. Trying to rewrite the URL to get from one to the other is an exercise in fiddly copypasting.