Testcase:

{-# LANGUAGE FlexibleInstances, UndecidableInstances, MultiParamTypeClasses, FunctionalDependencies #-}
module Foo where

class Mul x y z | x y -> z
class IsType a
class IsType a => IsSized a s | a -> s

data Array n a = Array
instance IsSized a s => IsType (Array n a)
instance (IsSized a s, Mul n s ns) => IsSized (Array n a) ns

ghc-7.0.0.20101014 rejects this with:

    Couldn't match type `s' with `s1'
      because this skolem type variable would escape: `s1'
    This skolem is bound by the instance declaration
    In the instance declaration for `IsSized (Array n a) ns'

ghc-7.0.0.20101005 and all previous versions accept it. This is from the llvm package, so is fairly critical.