404 processing happens in your index.php, by catching the exception and forging a new request for your _404_ route.

Did you alter your index.php, or using one from an old version of Fuel that you forgot to upgrade?

The standard index.php contains:

// Generate the request, execute it and send the output.
try
{
    $response = Request::forge()->execute()->response();
}
catch (HttpNotFoundException $e)
{
    // ...
}

If that code block is there, it can also be that your _404_ route is missing from your routes.php config file. If that is the case, index.php will rethrow the exeception as unhandled.