ah yeah the non-chroot problem... sorry 🙂
hm do the users really need ssh/telnet? if not you could set up a ftponly chrooted environment for them.
if they need interactive access to that machine... i know that chrooted ssh environments are possible, no idea if they're possible for telnet though.
another (unelegant) solution would be to put every web-using user in a group of its own and put the apache user there as well.
then you could chmod the public_html directory to 750 again and would be fine.
each user would be allowed to walk freely along the filesystem with the sole exception of other users public_html directories.
hmm not nice but easy to set up... decide for yourself.
Dominique