I have a project which is essentially a game server where users connect and send text commands via telnet.
The code is in C and really old and unmodular and has several bugs and missing features. The main function alone is half the code.
I came to the conclusion that rewriting it in Python, with Twisted, could actually result in faster completement, besides other benefits.
So, here is the questions:
What packages and modules I should use? I see a "telnet" module inside "protocols" package.  I also see "cronch" package with "ssh" and another "telnet" module.
I'm a complete novice regarding Python.
It sounds like you've got two separate tasks here:

Port the code from C to Python.
Rewrite the whole program to use Twisted.

Since you're new to Python, I would be inclined to do the first one first, before trying to make the program structure work in Twisted. If the program is old, there isn't likely to be any performance problems running it on modern hardware.
Converting the C code to Python first will give you the familiarity with Python you need to start on the port to Twisted.
Twisted Matrix and telnet server implementation