The same error happens from the command line going directly to avr-gcc or avr-g++ (avr-g++: _spawnvp: ...).
I couldn't find any reference to the problem in this user group. Using Google, I found a similar problem in another AVR group:http://www.avrfreaks.net/index.php?name=PNphpBB2&file=viewtopic&p=371741
I have no doubt that the problem will go away if I completely clear away all other Cygwin related tools from my machine. Unfortunately, that is not an option. I've run out of time today to do more experiments. I will try some things over the next day or two and report back on what corrects the problem.