If it works when run separately, but not in the larger script then obviously the problem is related to something before.

Then it is not being run by bash!

(There is no point to using the -e option with -n1; -e enables line editing, but since you are only allowing a single character to be entered, it is not possible to edit the line.)

Please put code inside [code] tags.

bash-3.00# cat test.sh
#!/bin/bash

The following code is bloated and convoluted; that can make debugging difficult. Please replace it with the snippet I suggested before.

        until [ -n "$CONFIGCACHE" ] && [ -n "$prompt" ] && [ -z `echo $CONFIGCACHE | sed -e 's/[YN]//g' ` ]
        do
                echo -n "Do you want to configure Cache Manager? [Y/N] "
                read -e -n 1 CONFIGCACHE
                echo ""
                prompt=1
        done

bash-3.00# ./test.sh
Do you want to configure Cache Manager? [Y/N] Y

bash-3.00#

And I repeat: What command line do you use to run it?