I've finally had some time to look at this and what's happening is term/xterm.el is fighting with term.el. The bracketed paste command comes in with "\e[200~", arrives in term/xterm.el's xterm--pasted-text function first. It correctly reads the text from the clipboard. This is because xterm-translate-bracketed-paste is registered as a key binding for [xterm-paste] (or "\e[200~" on RXVT).
Immediately thereafter, term--xterm-paste in term.el notices the [xterm-paste] key as well (it has also registered a binding for "raw" mode), and begins the same process of xterm--pasted-text. At this point, there's nothing to read from read-event, and it hangs for most-positive-fixnum (basically, forever).
So this is the root cause analysis. Unfortunately, naively removing the key binding from term.el does not work, because the pasted text must be inserted via term-send-raw-string.
-Matt