JQuery 1.2.6 may cause JS error when trying to add content to Panels

(See http://drupal.org/node/812744#comment-3254172 for the full story)

Can't add new content to panels, UI hangs after "Finish" button is clicked and nothing is saved after I force the JS popup window to close and click "Update" or "Update and Save".
Very frustrating...
Sometimes I get the screen with the [{"command... text (See #1).

I'm running:
Drupal 6.16
PHP 5.2.13-0.dotdeb.1
Web Server nginx/0.5.33
JQuery Update 1.2.6
Chaos tool suite 6.x-1.4
Lightbox2 6.x-1.9
Panels 6.x-3.4
Boost 6.x-1.18
Custom theme based on Zen and Zen-960

Hope this will help to solve this bug asap.

EDIT:
I tracked FF Error Console and here is what I saw...
When clicking "Finish" (while trying to add a content to a panel), I saw an error: "a is undefined" Line 13. When I clicked on the JS file under the error title, it opened a JS file that belongs to JQuery 1.2.6 and highlighted the problematic line in the file. I will attach that line as a txt file soon (it is quite long).
Maybe someone can make sense of the whole thing.

The attache txt file containing the problematic JS line in JQuery 1.2.6 JS file (see #35).
How do I know it is from a JQuery 1.2.6 file?
Above the problematic line there are a few comments:

/*
* jQuery 1.2.6 - New Wave Javascript
*
* Copyright (c) 2008 John Resig (jquery.com)
* Dual licensed under the MIT (MIT-LICENSE.txt)
* and GPL (GPL-LICENSE.txt) licenses.
*
* Date: 2008-05-24 14:22:17 -0400 (Sat, 24 May 2008)
* Rev: 5685
*/