I still think it has something to do with the Dallas reset circuit. That circuit depends on the state of DTR to control whether the MCU is in ISP mode or not. While the Dallas MTK controls DTR, not all terminal programs do--or do so in a way that is not helpful when using DTR to control ISP. I'm also not sure what the MAX232 does when an input voltage is removed--does it retain its previous state or does it default to a specific state that might be causing problems? I'm sure these details can be obtained from the datasheet.

To remove all question, you might remove '125 (U11) which is the Dallas ISP circuit and remove '126 (U12) which is the Atmel ISP circuit. Removing both of those ICs will leave the reset-related circuits in their unmodified state. Nevertheless, if you jumper JP4 to the "no" state it's effectively disabling the '125 so jumpering JP4 to "no" should be equivalent to completely removing the '125. But if jumpering it to "no" doesn't solve the problem, the next step is to completely remove the '125 and see if you observe any difference in behavior.

Note that I found that the Dallas part doesn't want any reset circuitry, not even an RC network. So when using a Dallas part, also try completely removing jumper JP5.

Regards,
Craig Steiner