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This sounds a lot like bug #28925, about others, most of which have had more success using the radeon drivers, or getting the fglrx driver by apt-get install xorg-driver-fglrx (which is what I did, because I've had similar troubles with an X800). I would try that.
I've noticed most of the ATI cards newer than the radeon 9600 don't work with the ATI driver, and I suspect the problem may be somehow linked. But that's just a suspicion. I'm not sure what we could do about that.