"The Star Wars restoration process began with a 10-bit RGB high-definition scan of the original negatives. This data was then used by a team at Lucasfilm and Industrial Light & Magic to work with George Lucas to do some significant color correction to the movies. This color-timed data was then transferred to Lowry Digital hard drives, to begin the massive clean-up effort."

So Lucas and ILM are to blame for the horrible colors. I guess Lowry did a good job removing scratches. But that is very stupid to do it that way. You get the highest quality scan, then you remove whatever picture flaws or dirt. The LAST thing to do is color correction. If you color correct a film covered in dirt, then wouldn't there be a risk of the color being oversaturated and unbalenced when the dirt is removed? Maybe that's what went wrong.
To see how Star Wars looked before THX, look at the official screenshots page for the Japanese Special Collection.
I hope the people who originally posted these shots don't mind me reposting them for comparison.

Film example
http://www.uploadfile.info/uploads/f4a8af8c3b.jpg

dvd

http://www.uploadfile.info/uploads/cfc1fd48d7.jpg

X0 newsletter (Judge it not by its size but by color & contrast)

http://www.uploadfile.info/uploads/88ec861348.jpg

dvd

http://www.uploadfile.info/uploads/1c5faef7a9.jpg