That configuration doesn't look correct; surely you only want to
masquerade packets which are leaving on certain interfaces (e.g., -o
eth0), and not _every_ packet leaving the system.  Try fixing that, and
see if the problem goes away.

Of course, a working configuration (even an incorrect one) shouldn't be
affected by a security update if we can help it.  Did you verify that
booting the old kernel restored the old behaviour?

-- 
Lattest kernel linux-image-2.6.20-16 broke netfilter MASQUERADE 
https://bugs.launchpad.net/bugs/117303
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