Version: (using KDE 4.1.1) OS: Linux I've added 'Israel' to the list of active keyboard layouts (in addition to the existing US English) and set switching option to Alt-Shift. It stopped working as soon as I selected 'Shift cancels Capslock'. The same happened if Ctrl-Shift was selected for layout switching. There was no problem if switching option was set to a single key, like Left Ctrl key.
This is not a problem of keyboard KDE module but rather one of x.org's xkb. You may want to file a bug on freedesktop.org.