Danzel has released a telnet client for the PSP, and its called Peldet v0.2
Heres the info:
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.