Confirmed.
This is being overriden by Compiz. As a workaround install
compizconfig-settings-manager and set the terminal command in
System>Preferences>CompizConfig Settings Manager>Gnome
compatibility>Commands>Terminal command line.
** Changed in: compiz (Ubuntu)
Importance: Undecided => Low
** Changed in: compiz (Ubuntu)
Status: New => Triaged
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ignores GNOME preferred terminal application setting
https://bugs.launchpad.net/bugs/352656
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