For archiving purposes:

I've finally fixed my machine up with as follows:

1. chosen kernel was 2.6.12-r5 as it fixes ugly bug with iptables 
which takes ages for applications to load.

2. configured grub without using initrd

title  Gentoo linux (update)
 root (hd0,0)
 kernel /kernel-genkernel-x86-2.6.12-gentoo-r5 root=/dev/hda11 
video=vesafb:1024x768-32@72 splash=verbose

After doing all that system became usable again and boots with no 
glitch. Thanks everybody for help.

-- 
Dmitry Makovey
Web Systems Administrator
Athabasca University
(780) 675-6245