Ben, You were right, the initrd was corrupted. I rerun $ dpkg-reconfigure linux-image-3.2.0-4-486 and it worked. What's strange is that the file list given by lsinitramfs is the exact same one from before the reconfigure. But the size differs a bit. I didn't backup the older initrd so I can't compare right now. Not sure if this is a bug or an random issue, Feel free to close the bug report.
Thanks a million.
