I too think it must be a character the terminal (or xterm) doesn't like, and it somehow affects only full screen mode.
I don't have any N800 telnet installed so I don't know its capabilities, but the desktop telnet has a possibility to enable a tracefile where transfer data can be logged.
If the N800 version can't do it maybe you could analyze the traffic with a desktop telnet connection. It's been a long time since I've used telnet (for anything else than testing if e.g. an ssh- or http port is alive), but IIRC some telnet clients also had the possibility to filter the data stream (remap characters), which could possibly be used if there's indeed some strange character.

However, there's one quick test you could do right away - change your terminal emulator. Before you run telnet, enter
export TERM=vt100
to change to a different, xterm-compatible subset of the xterm terminal type. See if that makes any difference.