I suspect the problem is somehow related to this bug

http://bugs.mysql.com/bug.php?id=63386

My version is 5.0.8 enterprise, and this bug was reported in version is 5.1.9

Seems like the MySQL database version just doesn't support what I'm trying to do. Has anyone else success in setting up a MySQL linked server at all with a version similar to what I've posted?

Also noticed this MS bug, EXACTLY the symptoms I'm seeing but with an Oracle ODBC driver instead

http://connect.microsoft.com/SQLServer/feedback/details/187192/openquery-to-linked-server-hangs-leaving-spid-with-open-tran-that-cannot-be-killed-then-templog-ldf-grows-without-limit-requires-sql-server-restart-on-production-servers