adding -fno-defer-pop in addition to -O and -fomit-frame-pointer seems to prevent the error without much sacrifice in performance.

Also the following patch seems to remove the error,
I only need to mask out indirect addressing on the second run
of the function, but it's possible my test cases are not complex
enough, it also works if indirect addressing is always
masked out, but it generates more assembly instructions to
do the same thing.

--- gcc-3.3.5/gcc/config/m68hc11/m68hc11.c 2006-11-02 15:24:29.000000000 -0700
+++ gcc/gcc-3.3.5/gcc/config/m68hc11/m68hc11.c 2006-11-02 15:17:07.000000000 -0700
@@ -743,11 +744,19 @@
 
       return 1;
     }
-  addr_mode = m68hc11_addr_mode | (strict ? ADDR_STRICT : 0);
-  if (register_indirect_p (operand, mode, addr_mode))
-    {
+
+    int mask = 0;
+    static int c;
+
+    if(c++==1)
+        mask = ADDR_INDIRECT;
+    addr_mode = (m68hc11_addr_mode & ~mask) | (strict ? ADDR_STRICT : 0);
+
+    if (register_indirect_p (operand, mode, addr_mode))
+ {
       return 1;
     }
+
   if (PUSH_POP_ADDRESS_P (operand))
     {
       return 1;