I have performed some more experiments, and got some results that may be of value.
First, I found out that I actually can reproduce the problem easily, I just did not notice it sometimes earlier because TC reached the limit of path length too fast.
Second, I have now created on my WinXP system the structure
described earlier by
MVV, and TC went quite deeply into it. However, the limit seems to be set not by the maximum path length but by the nesting level of 32 (starting from the first reparse point TC met). When I start searching, TC reaches this limit very fast, so I was sure there was no cycling, but then I managed to catch a glimpse of repeated directory names in the Find Files dialog's status bar. So I started File Monitor and discovered that indeed TC reads the contents of the deeply nested paths, see screenshot:
http://flint-inc.ru/Temp/tcbeta80/search_cycling_links_filemon.png
And third (and, I think, most important of all), this can be reproduced only when I'm searching for something
non-existent! That is, if I leave the "Search for" field empty, TC does not cycle through the junctions and stops immediately as cycle is detected. But if I specify something like "xxxx" and start searching, TC goes deeper and deeper, resulting in the screenshot above.