Yeah, it's a memory leak. Knytt Stories uses an old version of the Animated Picture extension. I detected the leak during the creation of Saira, and contacted the author of the extension who fixed it instantly. I forgot to update Knytt Stories though. I guess it's time for another update soon, I guess it's a good idea to add the proportional full screen mode at the same time which is new to a recent build of MMF2.
This should only be related to the custom objects though. Custom music, tilesets, and gradients shouldn't suffer from this problem unless there's a problem with Multimedia Fusion 2.