Arduino Nano not responding with yellow led blinking fast Update: I started playing with a genuine Deumilanove and exactly same problem happened to it - d13 led blinking, but avrdude says stk500_recv(): programmer is not responding

I uploaded a largish sketch ~15kb to Arduino Nano v3.0 (clone) and that left the board in an unusable state. When connected to USB, a power LED goes on immediately and 1-2 seconds later the yellow "L" starts blinking really fast.
Here's the board I use, it's a cheap clone, but it worked really well before today.

Now, when I try to upload a new sketch I get an error:

avrdude: stk500_recv(): programmer is not responding


I tried making and ISP programmer out of genuine Duemilanove, using nano's ISP pins and tried following official instructions (didn't use any capacitors/resistors).
Either way when I click "Burn Bootloader" result is the same error:

avrdude: stk500_getsync(): not in sync: resp=0x15


I have connected "debug" leds to D7,8,9 and heartbeat fades in and out in idle, others stay dark.
When I click "Burn Bootloader" all leds go dark then it does few quick blinks on 7, then similar pattern for 8, and then heartbeat resumes. Sometimes this sequence is repeated twice.

I also tried editing preferences.txt to bypass bootloader, but that didn't help.

How do I restore this board or do a low level reset?
It seems to be in some failure mode, with pin 13 oscillating, but I don't know what that means.
I successfully restored both boards using the reset button:


Power off the board (I disconnected the USB cable from computer)
Press and hold the reset button
Connect USB cable (keep holding the reset button)
Click "Upload Sketch"
Wait a second or two until Arduino software says "Uploading..." in the status bar
Release the reset button


Use these steps to upload any small sketch, Blink example is a good choice.