Thank you for this bug report. I believe that the terminal accessed by Application->accessories->terminal is hard coded to be the gnome-terminal. I believe the problem is setting xterm as default in the preferred applications doesn't change this fact. I believe therefore the solution to your problem is you need Application->accessories->terminal to be whatever your preferred terminal is and not just be hard coded to always be the gnome-terminal.
Thank you for this bug report. I believe that the terminal accessed by Application- >accessories- >terminal is hard coded to be the gnome-terminal. I believe the problem is setting xterm as default in the preferred applications doesn't change this fact. I believe therefore the solution to your problem is you need Application- >accessories- >terminal to be whatever your preferred terminal is and not just be hard coded to always be the gnome-terminal.