pagination/prev and next page links not showing

OK, it seems that we have two errors here:

  1. You should use posts_nav_link() instead of previous_post_link() and next_post_link(). The functions you used point to previous/next posts, not pages. You can refer to the WordPress Codex for more information.

  2. You should place posts_nav_link() after endwhile so that it is not repeated for every single post excerpt displayed on the page.

So the code should look like this:

<?php get_header(); ?> 
<?php get_sidebar(); ?> 

<div id="blog">
    <?php if (have_posts()) : ?>  
        <?php while (have_posts()) : the_post(); ?>  
        <div class="post" id="post-<!--?php the_ID(); ?-->">
    <div class="post_meta">
        <h2><a href="<!--?php the_permalink() ?-->" rel="bookmark" title="Permanent Link to 
            <?php the_title(); ?>"><?php the_title(); ?></a></h2>
        <p class="post_date"><?php the_time('F jS, Y') ?></p>
    </div><!-- end blog_meta -->
    <div class="post">
        <?php the_content('Read the rest of this entry »'); ?>
        <img src="<?php bloginfo('template_directory'); ?>/img/dots_small.png" class="divider" alt="post divider">
    </div><!-- end post -->
    <?php endwhile; ?>
    <div class="pagination">
        <?php posts_nav_link(); ?>               
    </div><!-- end pagination -->
     <?php else : ?>  
        <h2 class="center">Not Found</h2>  
        <p class="center">Sorry, but you are looking for something that isn't here.</p>  
        <?php include (TEMPLATEPATH . "/searchform.php"); ?>  
    <?php endif; ?>
</div><!-- end blog -->

 <?php get_footer(); ?> 

Hope that helps, it works for me.