Slava Ocks, a developer working on SQL Server 2005 within Microsoft, reported similar problems in a blog posting earlier this month.”Our customers observed very interesting behaviour on high-end HT-enabled hardware. They noticed that in some cases when high load is applied SQL Server CPU usage increases significantly but SQL Server performance degrades,” wrote Ocks.Ocks then detailed testing which showed this behaviour where a system thread — in this case one cleaning out blocks of disk cache memory — is running at the same time as worker threads. “With Intel HT technology, logical processors share L1 & L2 caches. As you would guess [this] behaviour can potentially trash L1 & L2 caches,” he said.

Hyperthreading hurts server performance, say developers – ZDNet UK News

{Update}
The original story made it to Slashdot… interesting comments in the discussions forum. Apparently, Intel does mention the cache contention issues in their documentation.

OcelotBob writes:

In order for there to be a true benefit to hyperthreading, either the program, the OS or the compiler needs to determine that hyperthreading is enabled, and model the code to only use less than half the cache. It’s been known that way since the beginning, and frankly, is silly that MS is scratching their heads wondering why this is.