If you have NAT running on both of those routers you have to either account for it or turn it off.
As I stated in my post NAT is disabled:
Both of them have NAT disabled as well...
I just want to use m0n0wall as simple router without NAT, firewall or anything fancy. Routing between different networks...
I can replicate this scenario on lubuntu and after
ufw disable (disabling firewall) it works like a champ. Moreover in m0n0 scenario ICMP traffic is evidently blocked by M1 firewall as exact entry from M1 firewall log is :
X 13:41:50.268872 WAN 192.168.250.2 192.168.250.1, type echoreply/0 ICMP