This problem does not seem to happen any more. I tried this again with 4.4.0-4 and emacs 21.4.24-3 and backspace is working as expected. xfce-terminal is not packaged any more but I tried with xfce4-terminal 0.6.3-2 that might be the closest match.
If Mohan R agrees, I'd recommend closing this bug as "magically fixed". -- Antti Järvinen
