Actually already planned on that, just hadn't implemented it yet :) Do you think it could cause the listed problem, though? Either way, I'll try that as soon as I get to the bench.

How's this look?

/* Test program by Richard Slaughter. SDCC compiler.
Teaching myself to apply C code in Microprocessor applications
Should simply blink the LED each time the button is pressed.
Processor: Atmel AT89S8252
Speed: 12mhz
Instruction rate: 1mhz */

#include<at89s8252.h>
#define button P3_2
#define LEDc P3_4

void debounce(void);
void initInts(void);
void main(void);

/* above would all be in a header file */

void _sdcc__external__startup()
//Init all IO bits high
{
P1=255;
P2=255;
P3=255;
}

void initInts()
{
TL1=0; // Timer 1 -- gotta do the math to make this 1millisecond
TH1=0; // Timer 1 -- gotta do the math to make this 1millisecond
TMOD=17; // Tmr0/TMR1 both 16 bit no prescaler. 0001 0001
TCON=67; // timer 1 active, timer 0 not, int0 on & falling edge 0100 0011
IP=0; // all priorities default 0000 0000
IE=138; // both timers, enabled - int0 not enabled just yet 1000 1010
}

void button() interrupt 0 //button
{
IE=(IE & 0xFE); //disable int0
DBTmr=10; // or something...
if(LEDc==1)
LEDc=0;
else // Swap status of LED
LEDc=1;
}

void timer() interrupt 3 //empty timer
{
if(DBTmr!=0)
DBTmr--;
else
IE=(IE | 0x01); //then re-enable int0 after button stabilizes
TL1=0; // Timer 1 -- gotta do the math to make this 1millisecond
TH1=0; // Timer 1 -- gotta do the math to make this 1millisecond
}

void main()
{
unsigned int DBTmr=0; // initialize stability counter
initInts(); // Just initialize once, then
while(!button); // Wait til the button stabilizes high
IE=(IE | 0x01); //Enable int1.. was EX0=1, this didn't work...
while(1); // Loop eternally
}