I was doing peace negotiations with another civ and on the table there was the peace treaty and he was to give me two cities. The advisor said "we're getting close to a deal here" so I put in 150 gold and he changed to "They would never accept such a deal!".

Its doing it because the game doesnt let you trade cities for anything but under these circumstances deals like that should be able to happen.

This is not changed from PTW and I believe from most of the later patches in "Vanilla" Civ3.

As Speaker writes, this is intended, not a bug, and has been so since the first patch of vanilla CIV3. A city is not accepted as part of a treaty, unless what the other side offers is a peace treaty and nothing else.

This is to close the huge exploit found in the original version, where players either sold cities that was guaranteed to flip back, or cities that could very easily be reconquered.