SOLVED for me:
I have not previously had to edit my PHP files to make this plugin work. However the installation instructions of this plugin read:
In your theme, you need to find calls to next_posts_link() and previous_posts_link() and replace them.
In the Twentyten theme, it looks like this:
<div class="nav-previous"><?php next_posts_link( __( '<span class="meta-nav">←</span> Older posts', 'twentyten' ) ); ?></div>
<div class="nav-next"><?php previous_posts_link( __( 'Newer posts <span class="meta-nav">→</span>', 'twentyten' ) ); ?></div>
You would replace those two lines with this:
<?php wp_pagenavi(); ?>
Go to WP-Admin -> Settings -> PageNavi for configuration.
I use the theme andrea personally, which contains a number of php files (index, posts, single, search ect) containing such calls.
Replacing this entire block with "<?php wp_pagenavi(); ?>" sorted the problem. Oddly enough, just commenting the block like
<div class="navigation group">
<div class="alignleft"><?php next_posts_link('« Older Entries'); ?></div>
<div class="alignright"><?php previous_posts_link('Newer Entries »'); ?></div>
resulted in the comment marks showing up as text and the old style menu still being visible. Also putting the new line inside the "navigation group" block does NOT work. You have to replace it.
Apparently any comments in the php file index.php get put on the webpage as plain text. (Maybe because its inside a div block ?)