Nginx returns 404 on files with special characters

Which version of nginx are you using? This issue was addressed in 1.1.12: http://nginx.org/en/CHANGES

EDIT: If you can't update, you can replace your current error_page and try_files with:

location / {
  try_files $uri $uri /index.php;
}

location ~ \.php$ {
  # Leave the =404 at the end so we don't 500 when /index.php doesn't exist
  try_files $uri /index.php =404;

  proxy_pass         http://127.0.0.1:8080;
  proxy_redirect     off;
  proxy_set_header   Host $host;
  proxy_set_header   X-Real-IP        $remote_addr;
  proxy_set_header   X-Forwarded-For  $proxy_add_x_forwarded_for;
  proxy_set_header   X-Request-URI    $request_uri;
}

I solved this one from the suggestion of posting the nginx logs. I guess it's always a good idea to carefully inspect the logs. I made the mistake of placing the root inside the first location block of the server. Therefore when I navigated to the subdirectory it mapped the incorrect location. The following configuration makes it work the way I expect:

server {
listen 8000;
server_name localhost;
root /web/project_builds/;
location / {
index index.html;
autoindex on;    
}

location /campy_SAM {
auth_basic "Restricted content";
auth_basic_user_file /web/password_files/campy_SAM/.htpasswd;
}

}

It is still curious that it worked when I removed the authentication, with the root inside the first location block.... I can probably live without understanding why that is :)