We are have a short sale listing on which we are working with Wells Fargo for approval. I can absolutely tell you that Wells Fargo has not asked the listing agent to take back ups. However, as several other people have stated below, it is common for the agent to keep the listing active and accept back up offers. However, they should clearly state somewhere in the confidential remarks (show only to agents, not buyers) that they have accepted an offer and it is pending lender approval. As the first buyer in, your offer was submitted to the bank with the seller's short sale package. As a courtesy, the listing agent should (it doesn't mean they always do) extend to you an opportunity to raise your offer if need be. If you are willing to increase your offer, have your agent make it clear that you would like an opportunity to do so.
I hope that adds something to what others have already said below.
Best of luck!
San Diego Real Estate Specialist
Residential Sales and Appraisal