My result seems similar but I approached it from a different path. Here are the steps I tried and the result I got.
1. Imported a 8192x8192 RAW file as a Design map.
2. Made some changes to mark terrain as desert, Arctic and added a volcano
3. Set the terrain to be quadrupled in size - 16384 by 16384 and mosaic with a tile size of 4096 instead of 512.
4. Tried to generate the terrain from the design map.
The system created the first tile - 4096 by 4096 - however, as soon as the first tile finished generation the process ended. Also, an examination of the single tile that was created in the temp file revealed that it was actually a miniature of the entire terrain inistead of being 1/8 of an expanded version.
So it looks like the mosiac is shrinking the terrain instead of expanding it and when it runs out of terrain after the first pass it is ending without an error or setting the process to completed.
Hope this helps in tracking down the bug