Thanks Pauli,
I was recommended this option some time ago and indeed it restores display 
(forgot to mention it on this thread).
This problem appeared when I changed motherboard. I was able to access 
xorg.conf of my installation of Jaunty with Ctrl+Alt+F1. But the issue is that 
I don't think it's possible to edit xorg.conf with a live CD, so this means no 
fresh install for me.
Moreover, a number of 3D programs/applications fail and I suspect it comes from 
this workaround situation.
Do you mean it's a bug in the BIOS? Any reason why Windows is not suffering 
from this?

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[HD3650] Kubuntu: garbage screen
https://bugs.launchpad.net/bugs/368187
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