Thank you for reporting and helping with this.
Fixed this issue by moving to PHPMailer library for handling SMTP protocol. Please update to latest version 1.3.6 published on 30.07.2013.
For gmail use following settings on “Settings” -> “Mail server” page in admin panel:
- Mail protocol: SMTP
- Smtp host: smtp.gmail.com
- Smtp port: 587
- Smtp encryption: tls
- and your username and password for gmail