The problem was solved by creating a new copy of the file in another directory. As stated earlier this is a mega 65 issue, and not a problem with the game file.
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I've tested the game with Backbit on 2 additional c64:s with different revisions of motherboards, and there are no problems with these. Which leaves me with the conclusion that the c128 is the only platform that displays this behaviour. However, on the c128 it only occurs after playing for a while, tested death after level 3 and dying. Immediately pressing F7 after game have started cause no issues. The tests on the c64:s was similar to the tests on the c128.
Thanks for fast feedback! Yes, I have tried pressing F1 several times. Pressing F7 for title screen is also non-functional. I have tested the keyboard after additional deaths and input is not restored. By restarting computer and game keyboard input works until first death. Tests are performed on a C128 using backbit-cartridge.