Consider this program:

import pdb

pdb.set_trace()

print ("At line 5")
print ("At line 6")
print ("At line 7")
print ("At line 8")
print ("At line 9")

When set_trace starts the debugger, I set a breakpoint at line 8. When I
do that, the continue command starts single-stepping instead of what it
usually does.
Also, the module will appear twice on the call stack (although pdb won't
show this).

Here is the pdb session:

$ python pdbfail.py
> /home/petr/tmp/pdbfail.py(5)<module>()
-> print ("At line 5")
(Pdb) break 8
Breakpoint 1 at /home/petr/tmp/pdbfail.py:8
(Pdb) continue
At line 5
> /home/petr/tmp/pdbfail.py(6)<module>()
-> print ("At line 6")
(Pdb) continue
At line 6
> /home/petr/tmp/pdbfail.py(7)<module>()
-> print ("At line 7")
(Pdb) where
> /home/petr/tmp/pdbfail.py(7)<module>()
-> print ("At line 7")
(Pdb) quit
Traceback (most recent call last):
  File "pdbfail.py", line 7, in <module>
    print ("At line 7")
  File "pdbfail.py", line 7, in <module>
    print ("At line 7")
  File "/usr/lib/python2.5/bdb.py", line 48, in trace_dispatch
    return self.dispatch_line(frame)
  File "/usr/lib/python2.5/bdb.py", line 67, in dispatch_line
    if self.quitting: raise BdbQuit
bdb.BdbQuit

It doesn't matter whether the breakpoint is set from within a function
or not, but only the module-level frame is affected.

import pdb

def test():
    print ("At line 4")
    print ("At line 5")
    print ("At line 6")
    print ("At line 7")

pdb.set_trace()

print ("At line 11")
print ("At line 12")
test()
print ("At line 13")
print ("At line 14")

$ python pdbfail.py
> /home/petr/tmp/pdbfail.py(11)<module>()
-> print ("At line 11")

...[single-step to line 4]...

> /home/petr/tmp/pdbfail.py(4)test()
-> print ("At line 4")
(Pdb) b 14
Breakpoint 1 at /home/petr/tmp/pdbfail.py:14
(Pdb) c
At line 4
At line 5
At line 6
At line 7
> /home/petr/tmp/pdbfail.py(14)<module>()
-> print ("At line 13")
(Pdb) c
At line 13
> /home/petr/tmp/pdbfail.py(15)<module>()
-> print ("At line 14")
(Pdb) c
At line 14
--Return--
> /home/petr/tmp/pdbfail.py(15)<module>()->None
-> print ("At line 14")
(Pdb) c

The problem it seems is actually in the bdb module and not in pdb. The 
set_next function sets the current frame as stopframe but it does not 
specify the stoplineno. Hence it's always -1. When you do c(ontinue), 
set_continue just sets botframe as stopframe, if there are no breakpoints.  
Hence, stop_here wrongly returns True on every line event. To rectify 
this, set_next should also specify stoplineno for the stopframe and this 
should be checked in stop_here before returning True. Here is the patch.

Fixed in r83272 with a slightly different patch.  Thanks very much for the report!