It turns out they didn't, quite. It's still in stock on the Amazon website.
A reader tipped me to this story yesterday. It's not clear when it happened, but Amazon is selling the Kindle Touch again. It's listed for $99 (SO + Wifi), or $20 less than the Kindle Paperwhite. Amazon is also offering it without the special offers, though that model costs $40 more. If you do a little digging you will also find the 3g+SO model as a refurb for $129.
The price for the Wifi model, coincidentally, is exactly the same as what it was before the Kindle Touch was discontinued for the first time. That suggests that Amazon is seeing enough demand for this year-old ereader that they are continuing to have new ones made; they're not just closing out old stock. But I also doubt that Amazon is selling all that many; this model is not listed with the others and can only be found via a search.
For $20 off the price of the KPW, this ereader loses the frontlight and HD screen, but it gains audio, TTS, Whispersync for voice, and you also gain an extra 2GB more storage than the KPW.
Now that the Kindle Touch supports digital comics, the extra storage is a big plus. Add in the audio ability and you have a pretty good trade off for the frontlight and HD screen.
I have never been all that much in love with the HD screen, and the frontlight doesn't impress me either (it's too uneven). So if I were buying a new Kindle today I would seriously take a look at the Kindle Touch.