This bug is still present in the 2010-01-24 daily live of Xubuntu.
I installed and got the same result as earlier.
This time however I tried to compile the rt2860 driver directly from Ralink. 
The original source release does not compile because of an error, but with a 
source patch back from Ubuntu 9.10 (I can probably find the link again if 
needed) I managed to compile anyway.
The self-compiled driver did however not help at all - in fact it seemed to 
make everything worse since the driver wouldn't load and function with network 
manager.
The way I ended up fixing it in the end was by simply installing the old 
2.6.31-18 kernel from the archive - now everything works perfectly.
This is clearly (imho) a bug in the kernel, so I'm thinking it should be fairly 
simple to revert whatever kernel patch is causing this..

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[lucid] rt2860 frequently fails to connect to mixed mode WPA/WPA2 secured 
wireless networks
https://bugs.launchpad.net/bugs/496093
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