It took me a little while to get passenger set up with Nginx because I wanted to compile Nginx separately instead of using the tool provided with the passenger gem. I have it all working now so here’s how I did it. I’m running OSX Leopard but this should be fine on any Linux distro too.

sudo gem install passenger
cd `passenger-config --root`
rake nginx

Download latest stable nginx tarball. (currently 0.6.36) to the directory of your choice, then, in that directory

tar -xzf nginx-0.6.36.tar.gz
cd nginx-0.6.36
./configure --with-http_ssl_module --add-module=`passenger-config --root`/ext/nginx
make
sudo make install

OR

If you already have nginx installed you might just want to copy the nginx binary from objs/nginx and replace the existing nginx binary with that.

cp -f objs/nginx /usr/local/nginx/sbin/nginx

Edit the nginx.conf (should be in /usr/local/nginx/conf) to add passenger_root, again you can get this path with passenger-config --root.
Create a virtual host with a root in the rails app public dir and set passenger_enabled on; also set rails_env development;. It is important that the server root directive is set to the public directory of your rails app.

The following is an excerpt from my nginx.conf with passenger relevant config only:

http {
  #
  #
  passenger_root /Library/Ruby/Gems/1.8/gems/passenger-2.2.2;
  #
  #
  server {
    listen 80;
    server_name www.example.com;
    root /some/path/to/my_rails_app/public;
    passenger_enabled on;
    rails_env development;
  }
  #
  #
}