I am not sure if this is new to 1.25 exp or also on live, but the bug is twofold. This is the behaviour when trying to refuel a torch (in my case a long torch) with rags:

1. Dragging within inventory - the rags on the torch will highlight in red, the action is simply not possible.
2. Putting the torch on the ground, having rags in your hands and using the "Refuel with rags" action will instead craft Improvised Hand Wraps from the rags... And yes, I am sure that I didn't use the wrong action.

I was on the DayZ EU - DE 2220 server when this was observed.