first of all, am not a newlib devloper, just a regular user. I noticed
the exact same problem in RAM constrained ARM microcontrollers when
using newlib together with an RTOS that I developed. The solution I
found is different though, and is to apply a simple patch to newlib
that redefines BUFSIZ to 512 instead of 1024. That small change later
became part of a larger patch that can be found here:
http://gitorious.org/miosix-kernel/miosix-kernel/blobs/master/miosix/compiler/gcc-patches/newlib.patch
The relevant lines are 32--39.