Folder to Subdomain- File not found error

It is not going to work when pointing to domain.com/abc because of the way that WordPress does redirection. Your best bet is come up with some mod_rewrite redirection code to place in your top level .htaccess file that rewrites the URL of all traffic coming in for domain.com/abc to abc.domain.com. Then you don’t need WordPress to work under two sets of URL’s.

see if this article helps

http://terriswallow.com/weblog/2008/htaccess-redirect-a-directory-to-a-subdomain-and-force-www/

translating its code to your example, you should have

Options -Indexes +FollowSymLinks

RewriteEngine On
RewriteBase /
RewriteCond %{HTTP_HOST} ^domain.com [NC]
RewriteRule ^(.*)$ http://www.domain.com$1 [L,R=301]

RedirectMatch 301 ^/blog/(.*)$ http://blog.domain.com/$1

place the code in your .htaccess file before the code that WordPress added to the .htaccess file