Not a bug in xterm, but a limitation of the X libraries.

http://invisible-island.net/xterm/xterm.log.html#xterm_188
Patch #188 - 2004/5/12 - XFree86 4.4.99.6

modify initialization of 256- and 88-colors so that colors beyond 16 are
normally not X resources. This works around a hard-coded limit in Xt
which breaks xterm when 256-colors and luit are both configured (report
by Noah Friedman).

-- 
xterm ignores VT100 widget resources color16 through color255
https://bugs.launchpad.net/bugs/438850
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