Sony cites lack of demand for the lesser PS3 for this decision. The real question is, why did they make it in the first place?
Sony's decision to offer two versions of the PS3 is like Porsche making two very expensive cars, identical, except one has a 1990 Geo Metro engine. Sure, both are shiny, but the person in the market for such a product would never choose a 1 liter, 3 cylinder, 49 hp engine.
So it goes with Sony. If you're asking (or demanding) that your customer drops a minimum of $500 (the lesser PS3) you've already excluded the vast majority of gamers. If a person is willing to pay $500, they're willing to pay $600, and therefore you have the lack of demand for the lesser PS3.
Why Sony couldn't figure this out is beyond me. Did they actually think that gamers would save up $500, but not $600? That they've been saving and saving only to buy the lesser of two very expensive PS3s.
This is another black eye for Sony. Sure, it doesn't sound like a big deal, "we just stopped making them because nobody wanted them...the consumer demands the 60GB version," but it demonstrates again how Sony has lost touch with their base.