There is post here that asks how to solve the circular reference error when returning a serialized object via EF4 CTP5. I ran into this same problem with a WCF web forms pr
If you turn off proxy creation you also turn off lazy loading. When serialization of entity occures it visits all navigation properties. If lazy loading is enabled it loads all related objects and tries to serialize them as well. Again it visits all their properties including navigation properties pointing back to parent object. At this point you have to say serialization that this property is circular reference or it will serialize the object again and continue in infinite loop.
The trick here could be to annotate your circular navigation property in child entity with the ScriptIgnore
attribute.