It sounds like you have a bad value in memcache and when a servlet hits it, it blocks the instance that's executing it. When you have multiple instances running, other requests can be served by other instances. When you set it to 1, that one faulty instance gets backed up and requests start timing out. That's the only reason I can think of that clearing memcache AND changing your # of instances would solve the problem. It's like your bad memcache value is a blockage in a stream. Clearing memcache clears the block. Increasing the number of instances allows other requests to flow around the block.
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