Actually, the feature DOES prevent keystrokes in certain cases, and is intended to. This video explains how it works:
http://www.apple.com/iphone/usingiphone/keyboard.html
Skip to about 2 minutes, 30 seconds in, and watch the word "time" example. This describes exactly what you're seeing here. Whether it's a bug or not we can agree to disagree on, but I can tell you with certainty that this was intentionally designed-in.
I'll also speculate and say it was probably done this way because in your case, tapping to reject a suggestion would not save you any tap-strokes as compared to hitting the delete key. tapping to reject a suggestion prevents you from having to hit delete multiple times. But in the "krsnet" case, you're already at the end of the word, and it shouldn't matter either way whether you tap-to reject or tap-to-delete.
Important to note that he says "...shrinks the target area..." not "prevents the use of those keys", but this isn't the point and is semantics and interpretation so we'll agree to disagree. I could also argue that "krsne..." isn't close to any common words that would be in the dictionary.