I upgraded to R2 via apt-get dist-upgrade, but it seems like KMS (kernel modesetting) is not enabled at boot, leading to a black screen when I type startx at prompt.

How I checked KMS is not enabled :
dmesg | grep drm
=> no output. Or
lsmod | grep kms
This is due to radeon module that is not being loaded at boot time.
To fix it, just run
modprobe radeon
The problem is in the /boot/config-2.3.6, it seems like the radeon KMS line is disabled : "CONFIG_RADEON_KMS is not set". In 2.6.39 it was "CONFIG_RADEON_KMS=y".
I'm not expert in kernel stuff, but I believe a rebuild of the kernel is required.