I just tried the following, and it worked just as expected:
;; scroll one line at a time (less "jumpy" than defaults)
(setq mouse-wheel-scroll-amount '(1 ((shift) . 1))) ;; one line at a time
(setq mouse-wheel-progressive-speed nil) ;; don't accelerate scrolling
(setq mouse-wheel-follow-mouse 't) ;; scroll window under mouse
(setq scroll-step 1) ;; keyboard scroll one line at a time
Do you get errors when you start emacs? Have you, in any other way, configured mouse behaviour in emacs?
Try a default .emacs configuration and add those lines, to see if something else interferes.
17 Jun '10, 17:32