Some useful info from a thread I posted a while ago regarding my Pinarello, but mirrors a lot of what's already been said:
http://www.bikeforums.net/classic-vi...pinarello.html

With better weather finally here, I was actually just working on my own chain length issue (from the above thread) and resolving it based on the info (mainly lengthening the chain). Upon removing the RD I realized that the cage spring hadn't been tensioned correctly and that was what was causing the issue (the chain was also too short but it was the RD that was the main culprit, it wasn't pulling back enough when in small/small and causing the slack in small/small).

Might be worth looking into -- either an incorrectly installed spring, a slipped one, or just a gummed up one in the RD. Miamijim's post with the pics in my thread was helpful to show what it should look like in the small/small (pulleys pretty much horizontal), and if it can't do that it could be the RD and the spring. (Though I could be wrong about this particular derailleur, as it's older than mine.)