I've always believed that Mach3 only works with a single pulse encoder. It's how mine works. I think using an encoder was hoped for but they could not get it to work with a parallel port. They never worked on Mach3 much after it was decided to start again with Mach4 so it was never implemented. Single point threading works with a single pulse per rev within certain limits. You need a lathe with a powerful enough motor, good torque at the spindle and high enough inertia in the drive train to make sure the rpm does not drop during the threading process. A small lathe with not very good electronic speed control will likely cause problems. A lathe with back gear and a powerful motor will work fine for large diameter threads, smaller threads will be doable with higher rpm so back gear will not be needed. If you have a mini lathe you may have trouble.

Some external controllers may have the ability to work with an encoder but I know the Warp9 Smooth Stepper I have only works with a single pulse and I have used a controller that did not work at all for threading, but they have been further developed since then. I have never seen any posts by people saying they have got Mach3 working with an encoder so I think people who want that option probably go straight to Mach4 as this is a more recent development and there are videos of threading using Mach4, external controllers and encoders.