P: CS6 Nearest neighbor no longer works properly

Photoshop CS6,
Using windows 64 bit
When image interpolation is set in the preferences to nearest neighbor and also set on the toolbar on top to nearest neighbor my image blurs when using free transforms. This happens when I reduce something more then 70% in RGB color mode. Also the Image was a 2 color neutral image (a jaquard weave).
Thanks,
Frederick