The problem is the AVRDUDE.CONF file. There are a few lines missing for the 85 processor (I think the 84 section is also deficient). The problem is solved by using a newer version of the file.
There is also a bug in the compiler (or linker) that prevents jumps / calls to the entire address range. The symptom is a cryptic message that includes something about "R_AVR_13_PCREL" and a failure to finish the build. This problem is solved by using a newer version of the toolchain.
So you don't have to "upgrade" your toolchain, later tonight I'll diff the old and new AVRDUDE.CONF files and post instructions for updating the file.