AVD hardware buttons not enabled
I know it has been a long time since the question was asked, but just to let the others to know.
You can manually edit the config.ini settings (on Windows 7 you can find it on C:/Users/the_user/.android/avd/the_emulator_name/config.ini).
Find out the line:
hw.mainKeys=no
And change to:
hw.mainKeys=yes
Hope this helps.
You'll need to modify the Device Definitions. To do this, find the "Device Definitions" tab in the Android Virtual Device Manager and double click on the device you're using.
Make sure the Buttons are set to Hardware.
Don't forget to update your device settings: