The issue, simply put, is over how much bloggers can excerpt from an article before the quoting becomes reproducing. It's an issue a lot of content producers struggle with because there are no hard-and-fast rules for fair use of other people's content.
The problem, in this case, is that AP went too far, demanding excerpts as short as 35 words be deleted. That's about two sentences, and just about any reasonable person would judge that to be an excerpt rather than a reproduction of an AP article (unless that article itself was only 35 words, and even then it would be debatable). From a web form that the AP has been using, it seems even five words from them would be considered infringing if not paid for.
Now AP is meeting with some self-appointed blogging representatives to hammer out some guidelines for bloggers. This is a good idea, but it cannot be used to restrict rights already given under fair use law. It can only provide additional rights of reproduction, and make suggestions to stay out of trouble.
But as much as I think AP's position is silly in all this, the response from blogs like TechCrunch is ridiculous. A complete ban on referencing AP stories? A boycott? Please. Not only does this give AP exactly what it wants, does anyone seriously expect that a wide range of bloggers is going to not talk about a story just because AP broke it?
UPDATE: I have to admit, this is pretty funny.