We were able to reproduce what you describe on a Power Macintosh 8500, by attaching an S-video cable to the secondary video port. After restarting the computer, it was apparent from the Monitors and Sound control panel that "another monitor" was present. Double-clicking a color in the Labels control panel produced the same situation as the ghost monitor, for more information see Tech Info Library article, "System 7.5: Known Color Picker Problems."
Workaround
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When the computer appears to hung, you can dismiss the unseen Color Picker dialog by pressing the return or enter key. The computer should then continue to working as expected, however, you cannot change the color with Color Picker.
Another workaround is to change the relative color bit depth settings of the "ghost" and visible monitors so the greater color depth is on the visible monitor. We set the visible monitor to millions of colors and the Color Picker dialog appeared on the main monitor.
Another workaround would be to attach a second monitor and set its color bit depth lower than the first monitor.