yup, Template Toolkit prints the template to STDOUT by default.

replace:
$output .= $template->process($file, $vars) ||

with:
$template->process($file, $vars, \$output) ||
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and it should append the template to $output.

or..

replace:
my $output =  "Content-type: text/html\n\n";

with:
print "Content-type: text/html\n\n";
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and get rid of the print $output statement at the end.

I prefer the first option as you can then pass the content to other subs, back to the caller, print it to a file, or anything else you may want to do with it..

cheers,

J