The problem is that the fix is not to source that is built during normal sketch compilation, but to the libraries provided pre-compiled in Arduino.
Have a look at this bug Google Code Archive - Long-term storage for Google Code Project Hosting.
and this thread: http://arduino.cc/forum/index.php/topic,95914.30.html
Personally, I am not a fan of String, even if some of the problems people run into are due to this bug. Anything that smells of dynamic allocation has no place, in my opinion, on such a memory-constrained platform. The problem is that statically allocated and strings and all the string.h stuff is complicated to a beginner. The String seems easy, so you can get something going faster than if you have to grok pointers and in-memory layout of strings and crap just to print hello world. But I think folks do not appreciate the limits of what you can do with String -- and with lots of other things like arrays and C strings too -- with so little memory, and wind up being forced to learn the details anyhow.