Problem solved - user error. I misspelled the path while SUBSTing and used c:\\directory instead of c:\directory.
Funny thing is, in most application it worked fine.
Still, it would be worth solving the issue. However I'm not able to reproduce this on WinXP.
Can you send me an email, so I can send you back a debug version of WinSCP to track the problem? You will find my address (if you log in) in my forum profile. Please include link back to this topic. Thanks.