OK. This is the setup, as I interpret it:
The DSL provider is using a .252 mask: two usable addresses, my side and your side. The provider side is 192.168.1.1, the address available to the user is 192.168.1.2. THe "DSL modem" is acting as a bridge (probably a 1493 ATM kinda bridge), and the default gateway the the user is s'posed to aim at is 192.168.1.1 (255.255.255.252).
The user has connected the output from the "modem" into the WAN port of his router (one input, four switched Ethernet ports out). The WAN port of the router is set for 192.168.1.1 (255.255.255.252).
The router is providing DCHP addressing for the (1-4) connected computers. By default, at least some of the routers are putting out 192.168.1.XX addresses to the LAN side, probably starting at ".1" The user has not yet told us what the inside addresses are that the router is putting out. IF they are 192.168.1.XX addresses, then that would be the problem...He would be routing from a 192.168.1.XX/24 network to a 192.168.1.0 /30 network...possibly with two of the devices using 192.168.1.1 or .1.2 (or actually NOT routing, because the router is seeing the "same" network on both interfaces...or at the very least has initiated some "WTF?" process and refuses to cooperate).
If he sets the router up to dispense just about any other address (like 192.168.100.xx) or anything that isn't 192.168.1.something, I think it'll fly.
As it is now, I think the inside "default Gateway" address is 192.168.1.1, the WAN interface is 192.168.1.2 with a default gateway of 192.168.1.1 (an address that exists on both sides of the WAN interface)...since the LAN 192.168.1.1 is directly attached, that's where the router is sending the packets. The packet gets to the LAN interface, is routed to the WAN interface, then gets routed back to the LAN interface instead of down the line to the provider.
That's my guess, I'm sticking with it 'till I hear some more specific information.
FWIW
Scott