1. Create the directory "category" (whatever it's actually called). CHMOD it to 777.
2. Create a new index template in MT.
3. Set the output file of the index template to "category/index.html".
4. Set the body of the index template to
CODE
<MTEntries lastn="1" category="CATEGORY NAME">
...
</MTEntries>
...
</MTEntries>
Where you fill in "..." with the appropriate formatting.
5. Save the index template, and rebuild your indexes. The file should show up in the directory "category/".