I have all items set to stack up to 127.

Ever since version 0.8.7 I'm having an irritating bug. If I have, for example, a stack of 64 dirt in the inventory and I proceed to pick up another block of dirt, it will form a new stack, instead of turning the 64 stack into 65.

I am almost positive this is due to not having the latest Bukkit server due to the Sound api being required, therefore making the plugin not actually do anything. If updating to the 1.3.2-R0.1 BETA build or newer does not solve this, please reopen.

I'm not able to replicate this, it seems to be working fine for me. I found a different bug with stacking though which I'll add a ticket for.

What version of CraftBukkit are you using? What other plugins are you using? (especially any that deal with inventory in any way). What is your full defaultItems.yml (or other config files)?