This has been really tedious, not for first timers...
So in the end looks like TB smtp interface is buggy or doesn't handle passwords with special characters or wathever.
I ended up installing Postfix, configuring it to relay to the smtp mailservice, setting the login details and changing the header to use the correct sender address.
After all this, I select the php mail() option in TB interface and the system still uses postfix smtp conf.
