I have stumbled upon this bug too. IMHO putting libraries as modules into 
application.xml breaks Java EE specification compatibility.
Java EE 5 specification (page 152) defines four module types: web, ejb, 
application client and resource adapter. Libraries, commonly used in ejb and/or 
web modules may be placed in ear file, but they *are not* modules.

Libraries should be dealt this way (Java EE 5 specification page 167):

...
c. A directory named lib is considered to be the library directory, as 
described in Section EE.8.2.1, “Bundled Libraries.”
d.For all files in the application package with a filename extension of .jar, 
but not contained in the lib directory, do the following:
i. If the JAR file contains a META-INF/MANIFEST.MF file with a Main-Class 
attribute, or contains a META-INF/application-client.xml file, consider the JAR 
file to be an application client module.
ii. If the JAR file contains a META-INF/ejb-jar.xml file, or contains any class 
with an EJB component annotation (Stateless, etc.), consider the JAR file to be 
an EJB module.
iii. All other JAR files are ignored unless referenced by a JAR file discovered 
above using one of the JAR file reference mechanisms such as the Class-Path 
header in a manifest file.

If deleting tags "modules" with libraries solves the issue, this means, that 
bug is not with WTP, but with JBoss Tools implementation. Libraries must not be 
placed within tags "module".

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