The reported behavior is caused by the fact that RadDiagram is setting the TextWrapping of the TextBlocks placed in its shapes internally. There is an attached property exposed for controlling the text wrapping. You can find it in the DiagramBehaviors class and the property is called TextWrapping.
In the older version (like 2013.1.220.45) this property was set directly on the text elements. On the other hand in the newer versions of our controls the property is set on the RadDiagramShapes and it is "inherited" by all its children TextBlocks elements.
I hope this helps.
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