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In the function ctools_block_content_type_admin_info() (line 291, ctools/plugins/content_types/block/block.inc), it assumed that $block->content would be a string. This is a wrong assumption. According the API documentation page:
content: The content of the block's body. This may be a renderable array (preferable) or a string containing rendered HTML content. If the content is empty the block will not be shown.
When $block->content is a renderable array, the line 291 will cause fatal error: could not be converted to string in filter_xss(). Since Panels is using ctools for the interface, this bug has implications to other module. For example:
To fix this, `$block->content` should be checked (and in some case rendered) before filter.
I've attached a patch to `ctools/plugins/content_types/block/block.inc`. The patch should fix the bug.
PASSED: [[SimpleTest]]: [MySQL] 121 pass(es). View
FAILED: [[SimpleTest]]: [MySQL] Unable to apply patch ctools.block_.inc_.patch. Unable to apply patch. See the log in the details link for more information. View