SharePoint People picker can resolve AD group but can not add

Hello,

I have two independent SharePoint 2010 servers and the problem is that Server 1 can resolve and add AD groups + users through the people picker. Server 2 can resolve both AD users and groups, but can only add users not groups . The following configurations are the same for both servers:

- searchadforests

- peoplepicker properties like searchadcustomquery, searchadcustomfilter etc using powershell

- useraccountdirectorypath

When I try to add a resolved group on server 2, the users textbox blanks out and I get a warning that the textbox should not be empty.

Any suggestions? Thanks.