Solution is simple (maybe not so obvious), and caused by newer FreeTDS 
version

So I've changed:
db = DAL('mssql://DSN=APP_DSN;UID=dbuser;PWD=dbpass', db_codec='utf-8', ....
to
db = DAL('mssql2://DSN=APP_DSN;UID=dbuser;PWD=dbpass', db_codec='utf-8', 
....

And everything is OK now/

-- 
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- http://web2py.com
- http://web2py.com/book (Documentation)
- http://github.com/web2py/web2py (Source code)
- https://code.google.com/p/web2py/issues/list (Report Issues)
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