Weird... well, if you already have the "Archive Messages" setting turned off as you said, and you're already using the Gmail trash folder on the server as I suggested, then the only thing I might suggest is to set it up on your phone as a generic IMAP account, rather than a Gmail account.
After you select "Add Account...", select the "Other" option. Use imap.gmail.com for the incoming server and smtp.gmail.com for the outgoing server.
Personally, I set up my Gmail this way because it gives me more control over certain options. Then I add an Exchange account to sync my Gmail contacts and calendar. So I end up with a generic IMAP account to sync email and notes, and an Exchange (Google Sync) account to sync my contacts and calendar with the benefit of push. You can use the Exchange account to sync email too, but it provides no option to make deleted items go to the trash--they always archive.
Here's some info on Google Sync:
http://www.google.com/mobile/sync/