Managed to reproduce this and the problem lies in mesa.
7.11.0+git20110325.226ae9d6-0ubuntu0sarvatt works properly.

** Package changed: xserver-xorg-video-intel (Ubuntu) => mesa (Ubuntu)

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https://bugs.launchpad.net/bugs/739801

Title:
  [sandybridge-gt1] GPU lockup (IPEHR: 0x02000004)

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