I've got a very odd problem with my new N900. Every time I try to use Skype, the internet connection dies. Other apps don't seem to do this (www browsing, mail, IM.)

I have N900 settings to connect automatically to WiFi. I've tried setting power savings mode to Off.
I'm using a Linksys router, WRT120N, WAP2 Personal mode.

I saw two system updates this week, one small and one large, so I'm assuming I'm on the latest.

I'm leaving the country for a very long time, flying out tomorrow, and trying to figure is this my local internet connection or the N900 itself (or just the Skype implementation.)
Thanks in advance.

I think you mean "WPA2" not "WAP2", but the built in Skype Client works for me over a WPA2 connection. No connection losses so far.

If your router has UPNP you could try to disable this. Skype usually works well without this, but tries to forward it's ports over it (not sure about the N900 implementation, but at least the windows one does). Maybe there is some kind of bug with UPNP in your router. Well..it should be disabled anyways as it can be a real security problem sometimes (e.g. malicious application forwarding Windows Filesharing Ports to the internet).

I'd assume that this would be your router getting baffled and rebooting itself, although Skype isn't exactly complicated and your router isn't a cheapo bottom-of-the-barrel model.
Normally you only hear of apps killing routers when somebody's running a complex peer-to-peer app on a cheap piece of rubbish.
At any rate, try going to Linksys site and updating the firmware on your router.

I have owned several N-mode routers, which are so beta and buggy, that they cannot handle even more than 16-32 parallel connections.
If i remember correctly, one was DLink, one was Linksys.

Have seen many times, that ie if wife's laptop and my laptop are connected, and somebody connects third computer or tries to surf web/open skype, router just reboots or dies silently.

Few suggestions:
1 - update firmware
2 - disable N mode in router config
3 - get a better router (i have apple airport extreme. not an apple fanboy, but it's stable in N mode on 2,4 & 5GHz. and expensive.)