Definitely sounds like something is amiss with your Mac. Using v1.81 of CD LabelPrint on OS X 10.6.3, I cannot get the same results as you have.
With my Print & Fax > Default Paper Size set to A4, I opened CD LabelPrint. Checking the Page Setup, it showed that my MP980 was set as the formatting printer and the paper size was set to the CD Tray.
With CD LabelPrint still open I then opened a document in Preview and when I select to print I can see in the print dialog that the Paper Size is still A4.
If I go back to Page Setup in CD LabelPrint and in the Settings tab select 'Save As Default' I do find that the Default paper size in Print & Fax has changed to US Letter, but the Paper Sizes in Preview and Safari are still at A4. (Not sure why you are using the Safe As Default setting here - it is not needed). This was even after closing the apps and restarting. Note that the setting would impact the paper size for newly created documents which is not what I am doing here - I am opening existing documents.
With all applications closed, I then change the Default paper size in Print & Fax back to A4. I then open CD LabelPrint again. On the top right corner of the application it shows the MP980 set as the printer. And when opening Page Setup, the MP980 is still the formatting printer and CD Tray is the paper size.
So, I am not sure if your i865 driver is the cause or your CD LabelPrint application. Like I said earlier, I am using v1.81 of CD LabelPrint which is listed as supporting Snow Leopard. I also have v10.30.3.0 of the MP980 printer driver. Checking the
Supported Printers page for Snow Leopard, the same v10.30.3.0 is available for your i865, so I suggest you ensure you also are using this latest driver.