What you need on your kernel command line is rather 'init=/bin/bash' and when you are at the prompt, start by mounting the procfs otherwise many commands will fail:
mount -t proc proc /proc

My plug was also very unstable, would reboot or hang (blue led off) with no message on the console. I never got an uptime > 12h until I removed the USB key I had plugged in. It's now been nearly 2 days. Wow...

I am running a Debian off a 4GB SDHC, with the original kernel (2.6.22.18). My USB key was of the cheap and anonymous sort and I haven't tried any other USB device since then.