The same issue can be observed on PHP 5.4.20.
The same issue can be reproduces on PHP 5.6.0RC4 :(
All compiled on Slackware Linux.

I was able to confirm that the bug is not there in PHP 5.3.29.
So it was introduced in 5.4.x .. oh my god this is serious, so many years ...
I am unable to find sources for PHP 5.4.0 for test. Ideas?

I was unable to get the mentioned memory error with Debian's PHP 5.4.4-14+deb7u14 (tested only with the CLI binary). The memory is properly freed there. However when I took the sources + patches from debian, and compiled on the very same debian box, the memory issue is there again. I tried with simple ./configure --with-mysql --with-mysqli, the compiled binary has the problem with memory which is not freed.

This is very odd. If anybody helps me to replicate Debian's compilation then I could maybe track down what option is responsible...

mind that
1) mysql_* APIs are deprecated and should not be used,
2) mysql_query is buffering the result set so it's all in memory and
3) your difference comes from using libmysql vs mysqlnd as client library, mysqlnd uses PHP memory and therefore PHP reports more accurate memory usage, with libmysql memory used inside the library is hidden

Thank you for your reply.
I'm not sure what difference are you mentioning.
There is NO DIFFERENCE AT ALL.
The memory problem is there for both, mysql_* and mysqli_* functions. It's the same.

Test it yourself, with this simple script:

<?php

   echo "connecting to database...\n";
   $link=mysqli_connect("localhost",'root','','test');

   echo "creating table with lots of rows...\n";
   mysqli_query($link,"CREATE TEMPORARY TABLE tbl123 LIKE mysql.user");
   for ($i=0;$i<6000; $i++)
   {
      mysqli_query($link,"INSERT IGNORE INTO tbl123 SET host='x".$i."'");
   }

   echo "getting all rows from database\n";
   $result=mysqli_query($link,"SELECT * FROM tbl123");
   while($row=mysqli_fetch_row($result))
   {
      echo "Mem used: ".number_format(memory_get_usage()/1024,1,'.','')." KB\n";
   }

   // expected result: memory usage still the same
   // Actual result: memory usage increases with each row :(

?>

Please note that the memory is freed when the mysql_query variable gets destroyed.
If you would loop over the mysqli_query part, you would see that the memory is freed.
Furthermore, the amount of memory used when all records have been fetched is approximately the same as not using the mysqlnd so you it is just an optimization or hidden from the memory usage as johannes said

I'm going to close this since I've identified the problem and I'll open a new bug for that.