Does "enable decoding of indexed textures ( using CLUT ) have to make graphic ugly ?

[gid15]

This is very useful option for several reasons-it provides speedup in some games,and in others it corrects some graphic problems.
However,in any game,when enabled it makes graphic looks ugly ( pixelated )
This is from jpcsp readme file :
- Enable decoding of indexed textures (using CLUT) in shader:
this option brings a performance boost when combined with
"Enable saving GE screen to Textures" and when the application is doing
manipulations on the Red/Green/Blue color channels of the framebuffer
(e.g. to implement some graphic effects, blurs or shadows). Available only as an
option as it might break the compatibility for other applications...

It doesnt say anywhere that this option has to disable texture filtering and make graphic pixalated...

So,I am wondering why it does that and can this be fixed ?
Is it maybe a bug with this option which has not been fixed so far ?

The reason is probably because I'm always keeping Jpcsp in the original PSP resolution, I never resize
To analyze if an improvement is possible, could you take a dump of a single frame when reaching such a situation?

- enable "Disable optimized VertexInfo reading" and keep the other video options to a minimum (only enable those really required for the game to run).
- start the game and go to a part where you want JPCSP capture the frame.
- Select Debug -> Tools -> Debugger. A new window will appear and the game will pause.
- in the debugger window, under "Misc", press "Capture next frame"
- Press "Run": the game will restart just for one frame and all the textures and intermediate rendered images will be dumped. Wait for the game to automatically come back to "Pause" again (this could take several minutes). The dump is then completed.

Upload (on some file server) the generated images under tmp/*.bmp and the log file.