Still unfixed in Ubuntu 11.04. I can manually type the folder's path in,
but the dialog doesn't allow me to select it.  It's very annoying, I
believe the bug should be rated higher than 'low'.

A little workaround:
1. Type the folder's path in manually ('/path/to/your/folder').
2. Instead of 'Location' select 'Application' with command like "gnome-open 
/path/to/your/directory" that is annoying.

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https://bugs.launchpad.net/bugs/38230

Title:
  nautilus "create launcher" can't create links to directories

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