I found the absolute easiest way to read a gzip file is as follows:

echo file_get_contents("compress.zlib:///myphp/test.txt.gz");

To create a gzip file:
file_put_contents("compress.zlib:///myphp/test.txt.gz","Put this in the file\r\n");

Things to note about this:
-The best prefix to use is "compress.zlib", not "zlib"
-If you wish to specify a path starting in the root path, you actually end up with three slashes.  The above path corresponds to "/myphp/test.txt" on unix, and "c:\myphp\test.txt" on Windows (if C: is the current drive).  I tested it just on Windows.
-Compression and decompression both use the same prefix of "compress.zlib://" (plus one more slash to get a root dir).
-I'm using 5.0, so I'm not 100% sure which behaviour started in which version.