Thanks to PEGLabs in the final diagnosis of this!!!
The problem is indeed a bug in older versions of OpenSSH triggered by a new feature of AbsoluteTelnet!
According to the SSH documentation, new encryption keys should be generated after every gigabyte of data or after 1 hour elapsed time, whichever comes first. AbsoluteTelnet v3.00 attempts to renegotiate new keys after one hour of connect time, and this throws older OpenSSH servers for a loop!! Newer servers are more compliant and expect the negotiation to occur, so no problems there.
For now, I've created a new beta that disables the key re-negotiation entirely. Most likely, I'll make it optional in the production release of 3.11, but the default will be OFF.
You can download the beta here:
http://www.celestialsoftware.net/telnet/beta_software.html