Although Digg calls this move an "update," the shortener no longer works for any URLs except for the URLs of Digg stories. It's an expected move, as Digg's URL shortener was heavily criticized for hurting websites' search rankings.
From the announcement: "As of May 17th, 2010, the Digg short URL feature will be available only for URLs that refer to stories submitted to Digg. Users will continue to be able to share their favorite Digg stories by generating a short URL via the 'Share' button. However, it will not be possible to generate a short URL for a web URL that does not refer to a submitted story on Digg. The 'shorturl.create' method in Digg API will be deprecated as of that date."
If you've used the Digg short URL feature in the past, you needn't worry about your links, as all URLs previously shortened by Digg will continue to operate "beyond this date."