The root cause is hat the cell creation undo leads to the focused editor being disposed, which leads to the focus going to the body (and leaving the notebook). Once clicking anywhere inside the notebook, undo works again.

Now that the cells and notebook list share the same undo/redo stack, the issue should be gone now.

I'm still seeing this in today's insiders

@RMacfarlane are you still seeing this in Insiders now?

Undo now works, but the focus indicator seems to get lost:

Pushed a fix which fixes this issue partially.

This happens when focus is in the editor, and when we delete the focused dom element, focus doesn't get reset to the list. We can't anything specifically for 'undo' because it happens in the model, but really we want to prevent this from happening for any cell modification. So I pushed a change to ensure that no list splice causes the list to lose DOM focus. Please take a look at the change @rebornix to check that this makes sense.