"I am using Port pins 3.4 and 3.5 both of which have internal pull-up's for SDA and SCL respectively."

1. Do you know internal pull-up value exactly?
2. Native I2C MCS51 devices have no pull-up's on the Px.x ports (see 80C552) and then you can assure exact pull-ups value you like, I think.
3. We use pull-up's always on such ports you mentioned, especially if we need fast I2C. It depends also on capacitance of I2C lines.
4. You can see on Atmel App. notes at this link:
http://www.atmel.com/atmel/products/prod72.htm and find there:
"Interfacing AT24CXX Serial EEPROMs with AT89CX051 MCU" app. note.
They use 5k1 pull-ups on P1.2 and P1.3.
Also you can look at: DS1303 App. note.
Their HW configuration is:
"SCL - P1.0, SDA - P1.1. The VDD voltage is 5V, RP = 5K"

Vaclav