I didn't read your post clearly enough. Yep, that would seem odd. You may have a bug there. I'm not sure why that happens. It looks like the outer context isn't taking the assignment, but hanging onto the initial value it receives from #value:.
I'm not totally sure we should expect to be able to do what you're trying to do in modern Squeak. I haven't assigned to a block arg in a long time (I keep allow block assignments off unless I'm loading old code.) I don't know what the status is there. I run a relatively recent Cog VM on a 10.7.5 Mac and I'm seeing the same behavior in Squeak 4.4.
When I switch to an old VM (3.8.18Beta3U) and run Squeak 3.0, your snippet works as expected. I'm not sure if this is in the image or the VM yet, or whether it's expected behavior or not with allowBlockArgumentAssignment (Again, I usually turn it off.)
The main take away here is, don't do that:) as it's a back-compat feature and it really ought to have a big sign on it that says DEPRECATED. If you're trying to load some older code and running into this, it might be better to actually rewrite it not to assign to block arguments in my opinion (and maybe I'm nuts.)
Can you tell me what VM you're using?
Smalltalk vmVersion "this will tell us"
And also which version of Squeak?
SmalltalkImage current systemInformationString "ditto"