I'd try reuploading the following files from the install archive (generally I always re download the archive from Central):
languages/english/markallread.php
scripts/markallread.inc.php
templates/default/markallread.tpl
Then clear the cache from the Control Panel; with any luck it's just a messed up cache file.
Installed the p2 patch (which included new markallread files), cleared the cache, and still get the same results (unless I need to wait a significant period of time after clearing the cache...)
Ideas?
*NOTE* see final reply below. Apparently it's good that I showed permissions on the files because the dates made me suspicious.