That is likely not intended so I guess it's probably inherent to how Xen and/or their I/O layer do the resource allocation.

I, too, have seen these freezes occasionally on small instances. If you think that is harsh then try one of the new micro's. ;-)

Anyways, I haven't had such a freeze last longer than a minute yet, and the instance would always recover. If yours does not recover then that would clearly be a bug.