Actually i missed that, that does rule out GPL-only - same as Apple's app store - GPL licensed software is still very much acceptable so long as it is dual-licensed under a license that conforms to MS' terms but even outside of that your claim about them not allowing open source is wrong.
GPLv3 and LGPLv3 reference app store-like ecosystems so of course they would never be able to exist in the WP7 or iOS markeplace but it seems with this amendment MS has proactively decided they aren't going to provide source distribution (perhaps to avoid the iOS GNU Go debacle) so that does indeed rule out GPL-only, however there is more to open source than the GPL. So no, they haven't banned open source software.