Created attachment 2898 shows the problem I am running debian testing with version 4.6.1 (Xfce 4.6). Terminal lists all the fonts that xfce has but does not display them correctly. In fact only "monospace" looks normal while the other fonts show overlapping letters and gaps between the letters. Please guide me to what additional info you need.
This is a problem in the vte widget. You probably experience the same problem with gnome-terminal and other vte-based terminals. This is because vte works with (fixed width) boxes for each character, not like a text editor. If you want to see this fixed, report the problem upstream in Gnome's bugzilla under the vte product.