telnet echo on/off causes strange crlf echo

Hello everybody. I am developing a telnet server emulation in C. Upon
login i send the client a IAC WILL ECHO in order to turn echoing off
for password input. After i get the password i send a IAC WONT ECHO to
turn client echoing back on.
The problem is that although the second messages make the client to
echo input characters, something goes wrong concerning the crlf
echoing. To be more specific every time i hit "enter" it just echoes ^M
on the client console.
If no IAC WILL ECHO and IAC WONT ECHO is issued everything work just
fine.
Any suggestions would be greatly appreciated. Thanx.