I upgraded xserver-xorg-video-ati to 1:6.12.192-2 (from debian, build
from src on ubuntu) - problem persisted..

when I upgraded kernel to 2.6.33.1 (config from 2.6.32-17.26 generic
flavor) - it seems, no more crashing or freezing...

I will try testing more extensively later, to make sure 2.6.33.1 solves
the problem...

p.s. I guess it is the time to notify kernel teem

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[X700] KMS, amd64: reboot or freeze while trying to launch system > preferences 
> appearance
https://bugs.launchpad.net/bugs/544741
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