Category is entered as an ID number, not as the slug or name.
Suggestion for change on the Query Posts Widget "mega form"
category (enter ID#)
How to find ID #
A quick way of finding what ID # your category has is to go to
(Hover over the category and see what the link is in the (status bar)*. Inside of this link is an ID)
here is an example when hovering over a category.
In this case category is "9" for Query Posts, not the friendly name that you have given it.
*enable status bar in Firefox 3.0+
>View (check on)Status Bar