According to this behaviour, I conclude your using Messenger Plus! 3 with MSN Messenger 7.5, right? If not, please include your Plus!, Messenger and Windows versions in your post. You can get these by sending "(!VER)" to a contact in any conversation, when Plus! is active.
Custom names in Plus! 3 can be hidden by changing the view mode in your contact list. Therefore, you go to the menu "Contacts" > "Show contacts with" > "Nickname". (or something like that, I don't have MSN Messenger 7.5 anymore) This will set the view mode back to default, with the nickname of the contact.
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