The original version of the deflate script had a coding error in it, which does cause it to stop legitimate traffic. After the correction is made, it should work normally, but an all-out attack on a server is only diminished by the deflate script - it won't stop it without advanced tools.
As previously pointed out, some hosting providers have the means to move a particular server's traffic through a hardware filter (at least temporarily) until the attack subsides and the cause is determined.
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