I am having the same problem on Kubuntu Hardy (with the latest ATI drivers).
Unfortunately the settings suggested by Dorgendubal  did not fix this issue for 
me, but I have found another (dirty) workaround: 

Dont use the "Logout" button on the K-Menu but rather just kill the
XServer using Ctrl-Alt-Backspace. If I do that X restarts just fine, and
I get back to the login screen.

-- 
Logout proces hangs
https://bugs.launchpad.net/bugs/38915
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