I'm almost certain the errors aren't caused by bugs to any significant
extent, but are caused as I said in my earlier post by using an 8-bit rather
than a 16-bit height map. The attached image shows two almost identical
height fields - the left hand one is 8-bit, and the right-hand one is a
16-bit version of exactly the same height field. The resolution of the
heightfield is 500x500 in both cases, and the smooth keyword is used for
both images.

The reason I think this is the problem is that the artifacts in your image
are very similar to the ones in my 8-bit height-field image.

-Chris

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