Question: When an object (A) casts a shadow and another object (B) is moved to a position about halfway between A and its shadow, so that A's shadow and B's shadows are very close to each other, the shadows become distorted. Why is this? Is it related to diffraction?
It can be due to diffraction yes ie due to the light having a different path distance to one object than the other.
One consequence of diffraction is that sharp shadows are not produced. The phenomenon is the result of interference (i.e., when waves are superimposed, they may reinforce or cancel each other out) and is most pronounced when the wavelength of the radiation is comparable to the linear dimensions of the obstacle.
When a beam of light falls on the edge of an object, it will not continue in a straight line but will be slightly bent by the contact, causing a blur at the edge of the shadow of the object; the amount of bending will be proportional to the wavelength.