Danzel has been hard at work on a telnet client for the PSP, and has released Peldet v0.2 Here is what he had to say:

I've been working on a telnet client for psp.

Currently has about all the basic stuff you need including:

• Ability to chose which wifi to connect to
• Chose where to telnet to
• Favorites

Give it a test. Its good enough that you could connect to a MUD and have a play. Text input is done through p-sprint, so check out its site to see how to use that, link is in the readme.