Netlify functions do not work on Nuxt v3

Netlify functions do not seem to work with the latest Nuxt 3.0.0.

I added a folder called “functions”, made a small event handler in this directory /functions/hello.js

exports.handler = async (event) => {
  const response = {
    statusCode: 200,
    body: JSON.stringify("Merry Christmas!"),
  return response;

I also added a netlify.toml file

    functions = "functions"
    from = "/function/*"
    to = "/.netlify/functions/:splat"
    status = 200

This will always throw a 404 when I run netlify dev - http://localhost:3000/function/hello
THis also throws an error http://localhost:3000/.netlify/functions/hello

Functions run on :8888 not :3000. :3000 is started by Nuxt and Nuxt server responds to that, it doesn’t know about Neltify Functions. :8888 is what Netlify CLI responds to.