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:
# Dragging within inventory - the rags on the torch will highlight in red, the action is simply not possible.
# 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.