Well, yes, you're trying to connect to port 1234, which isn't being listened to by anything. So it's hardly surprising that a connection is refused then.
As for your previous error, that was, of course, generated purely by configuration. But you knew that, apparently.
Telnet operates on port 23 by default, so xinetd only listens on port 23 for it, by default. If you want to run a telnet server on a different port, you'll need to setup service and xinetd entries for it.
It's the port you try to connect to which tells the computer you're talking to which service you're trying to use, and allows a simple TCP connection to be treated as a telnet connection by that computer.
Equally, doing "telnet localhost 22" will not manage telnet, but it will, in this case, connect to your SSH daemon, since you're connecting to that port. Of course, this is not useful unless you happen to be able to do cryptographic mathematics in your head. (Which comes naturally with practise, of course.)
I think you ought to hunt about on the web for a basic primer to networking. Rusty's Remarkably Unreliable Guides has a good basic one, in amongst his documentation of iptables (which he wrote much of):
You want the Networking Concepts HOWTO. If anyone hasn't read this, it's worth reading once, no matter how advanced you thought you were before reading.
All of Rusty's documentation is exceptionally good, especially given that not only is he a coder, but he also has an insane hamster forcing him into it. I'm very grateful to the hamster. And to Rusty. :-)