Try this: In a remote dired, do M-x shell, but then ^G when you see the long prompt.
OK, now in a local dired, do the same thing... and see the same results! Apparently if the first time you attempted to start it was in a remote buffer, that is then remembered for the rest of the emacs session. Note above I have not actually got to the first "$" shell prompt, canceling out with ^G each time I saw the scary long /.../.../.../ prompt.
